COST OF STATE REGULATIONS ON CALIFORNIA
SMALL BUSINESSES STUDY
Submitted by:
Varshney and Associates
2982 Aberdeen Lane, El Dorado Hills, CA 95762
sanjay@sbvarshney.com
(916) 799-6527
Authors:
Sanjay B. Varshney, Ph.D., CFA
Professor of Finance and Dean - College of Business Administration
California State University, Sacramento
Dennis H. Tootelian, Ph.D.
Professor of Marketing – College of Business Administration
California State University, Sacramento
September, 2009
TABLE OF CONTENTS
EXECUTIVE SUMMARY .............................................................................................................................. 3
ABSTRACT................................................................................................................................................... 3
INTRODUCTION........................................................................................................................................... 8
DIRECT COSTS TO ECONOMY AND SMALL BUSINESS ...................................................................... 10
DIRECT COSTS OF REGULATION .......................................................................................................................................10
METHODOLOGY TO DERIVE DIRECT COSTS ........................................................................................................................10
MULTIPLE PANEL DATA REGRESSION - GSP ......................................................................................................................12
FINDINGS OF DIRECT COSTS ...........................................................................................................................................12
SUMMARY AND CONCLUSIONS ........................................................................................................................................13
SECOND ORDER COSTS TO THE STATE’S ECONOMY AND SMALL BUSINESS ............................. 15
SECOND ORDER COSTS ..................................................................................................................................................15
METHODOLOGY TO DERIVE SECOND ORDER COSTS ............................................................................................................16
FINDINGS OF SECOND ORDER COSTS ................................................................................................................................17
SUMMARY AND CONCLUSIONS ........................................................................................................................................18
PRIOR RESEARCH AND WORK .............................................................................................................. 20
STUDIES ON THE COSTS OF REGULATION ...........................................................................................................................20
STUDIES ON THE COST OF STATE TAXES AND COMPLIANCE ...................................................................................................21
STUDIES ON STATE RANKINGS AND COST CONCERNS ...........................................................................................................25
GENERAL CONCLUSIONS AND RECOMMENDATIONS ....................................................................... 31
REFERENCES ............................................................................................................................................ 33
APPENDIX 1. SMALL BUSINESS SURVIVAL INDEX 2007 .................................................................... 35
APPENDIX 2. U.S. ECONOMIC FREEDOM INDEX .................................................................................. 55
APPENDIX 3. TAX FOUNDATION STUDY ............................................................................................... 59
APPENDIX 4. THE BEST STATES FOR BUSINESS (FORBES RANKING) ........................................... 62
APPENDIX 5. THE IMPACT OF REGULATORY COSTS ON SMALL FIRMS: CRAIN (2005) ............... 67
APPENDIX 6. PANEL DATA REGRESSION TO MEASURE DIRECT COSTS OF REGULATORY
ENVIRONMENT TO ECONOMIC OUTPUT ............................................................................................... 68
MULTIPLE PANEL DATA REGRESSION - GSP ......................................................................................................................68
ANALYSIS OF VARIANCE .................................................................................................................................................69
APPENDIX 7. RESULTS FROM IMPLAN ANALYSIS ............................................................................. 71
OUTPUT .....................................................................................................................................................................71
EMPLOYMENT .............................................................................................................................................................71
LABOR INCOME ............................................................................................................................................................73
1
INDIRECT BUSINESS TAXES .............................................................................................................................................73
APPENDIX 8. DIRECT COSTS TO HOUSEHOLDS AND RESIDENTS OF CALIFORNIA STATE ....... 75
APPENDIX 9. STATE REVENUES FROM REGULATORY TAXES AND LICENSES ............................ 76
APPENDIX 10. DIRECT COSTS TO SMALL BUSINESS IN CALIFORNIA ............................................ 78
APPENDIX 11. TOTAL COSTS (DIRECT AND SECOND ORDER) TO CALIFORNIA HOUSEHOLDS
AND RESIDENTS. ...................................................................................................................................... 79
APPENDIX 12. TOTAL COSTS RELATIVE TO GENERAL FUND.......................................................... 80
APPENDIX 13. TOTAL INDIRECT BUSINESS TAXES LOST RELATIVE TO GENERAL FUND
EXPENDITURES. ....................................................................................................................................... 81
APPENDIX 14. TOTAL COSTS (DIRECT AND SECOND ORDER) TO SMALL BUSINESS IN
CALIFORNIA .............................................................................................................................................. 83
APPENDIX 15. LOST LABOR INCOME RELATIVE TO CONSUMER SPENDING ................................ 84
2
COST OF STATE REGULATIONS ON CALIFORNIA SMALL
BUSINESSES STUDY
EXECUTIVE SUMMARY
ABSTRACT
This study measures and reports the cost of regulation to small business in the State of
California. It uses original analyses and a general equilibrium framework to identify and
measure the cost of regulation as measured by the loss of economic output to the
State’s gross product, after controlling for variables known to influence output. It also
measures second order costs resulting from regulatory activity by studying the total
impact – direct, indirect, and induced. The study finds that the total cost of regulation to
the State of California is $492.994 billion which is almost five times the State’s general
fund budget, and almost a third of the State’s gross product. The cost of regulation
results in an employment loss of 3.8 million jobs which is a tenth of the State’s
population. Since small business constitute 99.2% of all employer businesses in
California, and all of non-employer business, the regulatory cost is borne almost
completely by small business. The total cost of regulation was $134,122.48 per small
business in California in 2007, labor income not created or lost was $4,359.55 per small
business, indirect business taxes not generated or lost were $57,260.15 per small
business, and finally roughly one job lost per small business. This study provides the
most comprehensive and complete analysis of the total regulatory burden in California.
INTRODUCTION
This study measures and reports the aggregate cost of regulation to small
businesses in the State of California. It employs an original and unique approach using
a general equilibrium framework1 to identify and measure the cost of regulation as
measured by the loss of economic output to the State’s gross product, after controlling
for variables known to influence output. This cost is in addition to the cost of federal
regulation that is widely documented by previous studies sponsored by the Small
Business Administration’s Office of Advocacy.
Each of the 50 states in the USA superimposes an array of regulations over and
above those that exist at the federal level. The significance of the study derives from
the fact that over 90% of the firms in the USA employ fewer than 20 employees, and
large firms (500 or more employees) constitute only 0.3% of all firms. Small business
1
There are several factors that influence a state’s gross product. A general equilibrium framework
controls for all such known factors.
3
drives the economic engine and the gross state product. An adverse impact on small
business is bound to adversely impact the production of goods and services, the risk
tolerance of the American enterprise, the productivity of labor, the quality of life, and the
overall well being of the State and its citizens.
The ultimate drivers of growth and economic prosperity are innovation, economic
risk taking, and investment. The majority of this comes from small business.
Legislative and regulatory mandates often result in practices and enact policies that
raise the costs of operating for small business or provide a deterrent to small business
growth and hence provide disincentives for economic risk taking and entrepreneurship.
In addition to identifying the aggregate direct costs of regulation to small
business, this study measures the second order costs of regulation as those resulting
from indirect and induced costs and which impact the state’s gross state product
(GSP)2. Substantial research exists at both the federal and state levels that attempts to
understand, measure, describe, and articulate the impact that regulation may have on
small business and the resulting loss to the economy. Most studies are qualitative –
they describe the impact of regulation on small business, and do not quantify such an
impact. This study is the first to measure the aggregate quantitative impact of
regulations in a particular state, and as such can be used—with the appropriate
cautions—in conjunction with the federal studies published in 1995, 2000, and 2005 to
measure the accumulative impact of both state and federal regulations on California
small business.
METHODOLOGY
There are several factors that influence a state’s gross product. These factors
range from cost of labor and raw materials to cost of energy, quality of life issues,
education, job creation, economic climate, growth prospects, regulatory climate, etc.
We use Forbes data that combine the most comprehensive economic metrics available
that allow us to perform a general equilibrium analysis of the costs of doing business by
the various states.
After controlling for a wide variety of external factors that affect such costs, the
general equilibrium framework is able to truly isolate and measure the marginal impact
of the regulatory environment on the businesses, which in turn affects productivity and
gross state product. In addition, the study uses IMPLAN—an input-output model to
measure the second order costs of California state regulation as those resulting from
indirect and induced costs and which impact the state’s gross state product.
2
An example of second order costs as used in the federal study by Crain (2005) is how the cost of
environmental regulation will likely be reflected in higher utility bills paid by the consumer. The increased
utility costs will have a ripple effect throughout the entire economy, raising costs and impacting
productivity and income in all sectors in the state. Another example is workplace regulation that raises
healthcare costs. This will be reflected in higher premiums paid by employers which in turn will either be
passed on at least in part, if not total, to consumers of their products in the form of higher prices, or in
employees being asked to pay a larger portion of the premiums.
4
The total direct, indirect, and induced costs of regulation arising due to the
multiplier effect are presented in four ways: Output accounts for total revenues lost
including all sources of income for a given time period for an industry in dollars.
Employment demonstrates the number of jobs lost and is calculated in a full-time
equivalent employment value on an annual basis. Indirect Business Taxes consist of
property taxes, excise taxes, fees, licenses, and sales taxes that would have been paid
by businesses. Labor Income includes all forms of employee compensation that would
have been paid by employers (e.g., total payroll costs including benefits, wages and
salaries of workers, health and life insurance, retirement payments, non-cash
compensation), and proprietary income (e.g., self employment income, income received
by private business owners including doctors, lawyers).
Substantial research exists at both the federal and state levels that attempts to
understand, measure, describe, and articulate the impact that regulation may have on
small business and the resulting loss to the economy. Most studies are qualitative –
they describe the impact of regulation on small business, but most do not attempt to
quantify such an impact. This study is the first to measure the aggregate quantitative
impact of regulations in a particular state, and as such can be used—with the
appropriate cautions—in conjunction with the federal studies published in 1995, 2000,
and 2005 to measure the accumulative impact of both state and federal regulations on
California small business.
Much more work will need to be done to determine the exact nature of potential
remedies to the regulatory burden. This study does offer a methodology for deeper
study of various regulatory impacts and assessment of whether costs can be much
better controlled than under the current structure.
FINDINGS
This study finds that the total cost of regulation to the State of California—direct,
indirect, and induced—is $492.994 billion, which is almost five times the State’s general
fund budget, and almost a third of the State’s gross product. This cost of regulation
results in an employment loss of 3.8 million jobs which is a tenth of the State’s
population. In terms of labor income, the total loss to the state from the regulatory cost
is $210.471 billion. Finally the indirect business taxes that would have been generated
due to the output lost is $16.024 billion. These indirect business taxes lost could have
helped fund many of the state’s departmental budgets.
The total cost of regulation was $134,122.48 per small business in California in
2007, labor income not created or lost was $4,359.55 per small business, indirect
business taxes not generated or lost were $57,260.15 per small business, and finally
roughly one job lost per small business.
CONCLUSIONS
This study measures and reports the cost of regulation to small business in the
State of California. It employs an original and unique approach using a general
5
equilibrium framework to identify and measure the cost of regulation as measured by
the loss of economic output to the State’s gross product, after controlling for variables
known to influence output. It also measures second order costs resulting from
regulatory activity by studying the total impact – direct, indirect, and induced. The study
finds that the total cost of regulation to the State of California is $492.994 billion which is
almost five times the State’s general fund budget, and almost a third of the State’s gross
product. The total cost of regulation results in an employment loss of 3.8 million jobs
which is a tenth of the State’s population. Since small business constitute 99.2% of all
employer businesses in California, and all of non-employer business, the regulatory cost
is borne almost completely by small business. The general equilibrium framework
yields the following results:
• The direct cost of the regulatory environment in California is $176.966 billion in
lost gross state output each year. The direct cost does not account for second
order costs.
• The total loss of gross state output for California each year due to direct, indirect,
and induced impact of the regulatory cost is $492.994 billion.
• In terms of employment this total output loss is equivalent to the loss of 3.8
million jobs for the state each year. A loss of 3.8 million jobs represents 10% of
the total population of California. In terms of labor income, the total loss to the
state from the regulatory cost is $210.471 billion. Finally the indirect business
taxes that would have been generated due to the output lost arising from the
regulatory cost is $16.024 billion.
• The total regulatory cost of $492.994 billion is four to four and a half times the
total budget for the state of California, and almost five to six times the general
fund alone. Further, given the total gross state output of $1.6 trillion for California
in 2007, the lost output from regulatory costs is almost a third of the gross state
output.
• The indirect business taxes lost could have helped fund many of the state’s
departmental budgets. As an example, the indirect business taxes lost are 60
times the budget of the Office of Emergency Services, and would have paid for
almost half the budget of the Department of Education.
• The total cost of regulation was $134,122.48 per small business in California in
2007, labor income not created or lost was $57,260.15 per small business,
indirect business taxes not generated or lost were $4,359.55 per small business,
and finally roughly one job lost per small business.
• The total regulatory cost of $492.994 billion translates into a total cost per
household of $38,446.76 per household, or $13,052.05 per resident. The total
cost per household comes close to the median household income for California.
6
This study provides the most comprehensive and complete analysis of the total
regulatory burden in California. The study and findings have implications for policy-
makers and those in charge of the regulatory environment. The results also suggest
that future research should attempt to understand how to minimize the intended and
unintended costs of regulation. Since small businesses are the lifeblood of California’s
economy constituting 99.2% of all employer businesses, efforts to make the regulatory
environment more attractive will make California a more attractive state for doing
business. This in turn will improve the state’s output, employment, labor income,
indirect business taxes, economic climate, quality of life, living standards, and growth
prospects.
7
COST OF STATE REGULATIONS ON CALIFORNIA
SMALL BUSINESSES STUDY
DETAILED REPORT OF FINDINGS
INTRODUCTION
This study identifies and establishes the cost of the regulatory burden on small
business in California and assesses the extent to which this disadvantages small
business. It employs an original and unique approach using a general equilibrium
analysis3 to measure the additional cost to small business due to regulation in the State
of California. This cost is in addition to the cost of federal regulation that is widely
documented by previous studies. Each of the 50 states in the USA superimposes an
array of regulations over and above those that exist at the federal level. The
significance of the study derives from the fact that over 90% of the firms in the USA
employ fewer than 20 employees, and large firms (500 or more employees) constitute
only 0.3% of all firms. Small business drives the economic engine and the gross state
product. An adverse impact on small business is bound to adversely impact the
production of goods and services, the risk tolerance of the American enterprise, the
productivity of labor, the quality of life, and the overall well being of the State and its
citizens.
The ultimate drivers of growth and economic prosperity are innovation, economic
risk taking, and investment. The majority of this comes from small business. Politicians
and government officials often engage in practices and enact policies that raise the
costs of operating for small business or provide a deterrent to small business growth
and hence provide disincentives for economic risk taking and entrepreneurship.
In addition to measuring the direct cost of regulation to small business, this study
measures the second order costs of California state regulation as those resulting from
indirect and induced costs and which impact the state’s gross state product (GSP)4.
3
There are several factors that influence a state’s gross product. A general equilibrium framework
controls for all such known factors.
4
As an example used in the federal study by Crain (2005), the cost of environmental regulation will likely
be reflected in higher utility bills paid by the consumer. The increased utility costs will have a ripple effect
throughout the entire economy raising costs and impacting productivity and income in all sectors in the
state. Another example is workplace regulation that raises the healthcare costs. This will be reflected in
higher premiums paid by employers which in turn will either be passed on at least in part, if not total, to
consumers of their products in the form of higher prices, or in employees being asked to share in and pay
a larger portion of the premiums. This study does not attempt to measure the general equilibrium effects
that are dynamic, such as reduced innovation over time, or productivity losses over time, or efficiency
losses over time due to the cost of regulation. In this sense, the cost estimates in our study are
understated and do not measure the fullest extent of the state regulatory burden.
8
The study discusses its methodology and data, present its findings, provides a
comprehensive review of prior research and work, and finally concludes with key
findings and recommendations.
9
DIRECT COSTS TO ECONOMY AND SMALL BUSINESS
Direct costs consist of economic activity contained exclusively within the
designated sector(s). This includes all expenditures made and all people employed.
Direct Costs of Regulation
The study measures the net economic impact due to regulation in California by
measuring the direct costs to small business. The direct costs of regulation are
presented in four ways:
• Output accounts for total revenues lost including all sources of income for a
given time period for an industry in dollars. This is the best overall measure of
business and economic activity lost because it is the measure most firms use to
determine current activity levels.
• Employment demonstrates the number of jobs lost and is calculated in a full-
time equivalent employment value on an annual basis.
• Indirect Business Taxes consist of property taxes, excise taxes, fees, licenses,
and sales taxes that would have been paid by businesses. While all taxes during
the normal operation of businesses are included, taxes on profits or income are
not included.
• Labor Income includes all forms of employee compensation that would have
been paid by employers (e.g., total payroll costs including benefits, wages and
salaries of workers, health and life insurance, retirement payments, non-cash
compensation), and proprietary income (e.g., self employment income, income
received by private business owners including doctors, lawyers).
Methodology to Derive Direct Costs
As previously indicated, in 2001 the USA had a corporate tax rate of 39% which
was the sixth highest among all OECD countries. As other countries revised their
corporate income tax rates downward, the USA did not. As a result now the USA has
the highest corporate income tax rate in the world. Compounded with outsourcing of
jobs due to lower labor costs overseas, US business are faced with greater burden.
The difficulty faced by businesses lead them to seek out states that are less “unfriendly”
relative to other states.
Forbes began ranking states in the USA based on relative friendliness or
unfriendliness given the problem outlined above. They use 30 different metrics from
various sources such as Moody’s Economy.Com, Pollina Corporate Real Estate, Pacific
Research Institute, Tax Foundation, CFED: Sperling’s Best Places, US Census Bureau,
and Bureau of Economic Analysis among others.
10
Forbes uses the data to then rank states for the following six categories:
business costs, labor, economic climate, regulatory environment, quality of life, and
growth prospects. Forbes computes business costs through an index of cost of labor,
energy, and taxes. Labor represents educational attainment, net migration, and
projected population growth. Economic climate reflects job, income and gross state
product growth as well as unemployment and presence of big companies. Regulatory
environment measures the regulatory and tort climate, incentives, transportation and
bond ratings. Growth prospects reflect projected job, income and gross state product
growth as well as business openings/closings and venture capital investments. Finally,
quality of life is measured through an index of schools, health, crime, cost of living and
poverty rates. The major contribution by Forbes is the additional consideration of the
role that government plays on the business climate in terms of environmental and labor
laws, as well as tax and other incentives offered. These factors influence overall state
productivity and attractiveness to business.
This study uses The Best States for Business rankings provided by Forbes for
two years – 2006 and 2007. See Appendix 4. Forbes data is reliable in that it uses
credible sources of secondary data that are well recognized and respected as credible
independent research in the business world. Forbes data also enables a more general
equilibrium analysis of the costs of doing business by the various states. After
controlling for a wide variety of external factors that affect such costs, the general
equilibrium framework is able to truly isolate and measure the marginal impact of the
regulatory environment on the businesses, which in turn affects productivity and gross
state product. One may argue that there are many factors that influence a state’s gross
product. These factors range from cost of labor and raw materials to cost of energy,
quality of life issues, education, job creation, etc. The Forbes rankings based on 30
different metrics are the most comprehensive available. Therefore, this study relies
exclusively on the Forbes rankings that have already considered all the various metrics
that influence businesses and in turn productivity and gross state product. Most
estimates resulting from a partial equilibrium analysis are incomplete and may be
viewed as understated.
The study performs robustness checks by conducting the analyses separately
using data for 2006, and 2007, and then also by using the averaged data over the two
years. The study uses Ordinary Least Squares to perform a regression analysis to
analyze the extent to which regulatory environment impacts gross state product. After
conducting individual year based regressions, the study conducts a panel data
regression using ordinary least squares (OLS) that pools both time series and cross-
sectional data from both 2006 and 2007. OLS stands for Ordinary Least Squares, the
standard linear regression procedure. One estimates a parameter from data and
applying the linear model:
y = Xb + e
11
where y is the dependent variable or vector, X is a matrix of independent variables, b is
a vector of parameters to be estimated, and e is a vector of errors with mean zero that
make the equations equal.
Multiple Panel Data Regression - GSP
Dependent variable y: GSP
Independent variables X:
Business Cost
Economic Climate
Growth Prospects
Labor
Quality of Life
Regulatory Environment
This study does not attempt to measure the general equilibrium effects that are
dynamic such as reduced innovation over time or productivity losses over time or
efficiency losses over time due to the cost of regulation. In this sense the cost
estimates in our study are understated or do not measure the fullest extent of the state
regulatory burden. In this study we simply attempt to measure the general equilibrium
effects that are static, as well as the second order costs that are also static.
Further, the study uses the model IMPLAN (discussed in more detail in the next
section) to measure the equivalent number of jobs lost, labor income lost, indirect
business taxes not generated, given the lost state output due to the regulatory burden .
IMPLAN provides modeling based on data and tools to assess economic impacts at the
state, multi-county, and county levels. Widely recognized and used nationally and
regionally, IMPLAN has more than 1,500 active users in the USA and internationally.
These include clients in federal and state government, universities, and private sector
consultants.
Findings of Direct Costs
Appendix 4 presents the Forbes rankings of all fifty states for doing business
based on their overall attractiveness, business costs, labor, regulatory environment,
economic climate, growth prospects, and quality of life. These rankings are presented
for 2006, 2007, and 2008. In 2006, Forbes ranked Virginia (#1), Texas (#2), North
Carolina (#3), Utah (#4), and Colorado (#5) as the best states for business, and ranked
Maine (#46), Alaska (#47), Mississippi (#48), West Virginia (#49), and Louisiana (#50)
as the worst states for business. In 2007 Forbes ranked Virginia, Utah, North Carolina,
Texas, and Washington as the top five, and ranked Michigan, Alaska, Maine, Louisiana,
and West Virginia as the worst five.
In 2006 and in 2007, Forbes ranked Virginia, North Carolina, Michigan, Georgia
and Washington as the best states, and ranked Vermont, West Virginia, Montana,
Wyoming, Maine, and Rhode Island as the worst states for doing business based on
their regulatory environment. In 2006, California ranked #36 overall, #48 for business
12
costs, #17 for labor, #41 for regulatory environment, #22 for economic climate, #9 for
growth prospects, and #28 for quality of life. In 2007 California ranked #34 overall, #50
for business costs, #17 for labor, #39 for regulatory environment, #17 for economic
climate, #12 for growth prospects, and #26 for quality of life.
The output in Appendix 6 shows the results of fitting a multiple linear regression
model to describe the relationship between GSP and 6 independent variables. The
equation of the fitted model is:
GSP = 240566.0 + 12726.0*Business Cost - 3105.26*Economic Climate -
10803.1*Growth Prospects + 10712.6*Labor - 4113.06*Quality of Life -
4424.16*Regulatory Environment
Based on the model described above, the marginal impact of the regulatory
environment in a state on its gross state product is $-4,424.16 million for each rank
lower among the ranks of the 50 states in the USA. In 2006, Forbes ranked California
41st among the 50 states for its regulatory environment, and in 2007 Forbes ranked
California 39th. The average rank over 2006 and 2007 would be 40. A rank of 1 would
imply a loss of $4,424.16 in the GSP due to the regulatory environment and associated
cost. Therefore, a rank of 40 implies a total loss of $176,966.40 million or $176.966
billion in California GSP due the adverse impact of its regulatory environment. In other
words, the GSP for California would have been higher by $176.966 billion had the
regulatory environment not been as restrictive. This constitutes a direct cost to the
economy of California.
Summary and Conclusions
Using IMPLAN, the direct cost of regulation and loss of output totaling $176.966
billion translates into a loss of 1.085 million jobs, lost labor income of $81.815 billion,
and lost indirect business taxes totaling $1.759 billion.
To understand the implications of this direct cost better, we present several
informational tables in Appendices 8 through 10. These informational tables and
information are intended to help the ordinary citizen in California understand the
relevance and magnitude of the regulatory cost by relating it to important facts and
figures that they comprehend.
In 2007, there were approximately 12.8 million households in California. If one
were to imagine the direct cost of regulation that would impact every household in
California, the cost per household comes out to $13,800.93 per household annually.
Given a population of 37.77 million, the direct cost of regulation per resident is
$4,685.19 annually. See Appendix 8.
Our general equilibrium analysis provides us with a total cost due to regulation in
California after controlling for all the major factors that affect GSP. The benefit of
conducting such an analysis is that the total cost is all inclusive – both of implicit as well
as explicit costs of regulation. An example of explicit costs is the actual revenues
derived by various state agencies resulting from regulation such as regulatory taxes,
13
licensing fees, and fines. Appendix 9 provides a table taken from the Department of
Finance provides a summary of 2006-07 such revenues derived by various state
agencies and their sources. These revenues that the state agencies collect and then
spend constitute an explicit cost of enforcing regulation. The total figure of $120.132
billion for all regulatory taxes, licenses and fees in Appendix 9 is less that the total direct
cost of $176.966 billion with the balance being explained by implicit costs.
Most importantly, it helps to understand what these costs mean to the small
business in California. The Small Business Administration Office of Advocacy 2007
report for California reports that in 2006, there were a total of 3,675,700 small
businesses in California (See Appendix 10). Of these 1,137,100 firms were “employer”
small business (92.2% of which were small), and of these 696,300 were non-farm
employer small business. This means that the direct cost of regulation was $44,144.95
per small business in California, labor income not directly created or lost was
$22,258.42 per small business, indirect business taxes not generated or lost were
$478.58 per small business, and finally roughly one third of job lost per small business.
14
SECOND ORDER COSTS TO THE STATE’S ECONOMY AND
SMALL BUSINESS
In addition, this study measures the second order costs of California state
regulation as those resulting from indirect and induced costs and which impact the
state’s gross state product. As an example used in the federal study by Crain (2005),
the cost of environmental regulation will be likely reflected in higher utility bills paid by
the consumer. The increased utility costs will have a ripple effect throughout the entire
economy raising costs and impacting productivity and income in all sectors in the state.
Another example is workplace regulation that raises the healthcare costs will be
reflected in higher premiums paid by employers which in turn will either be passed on at
least in part (if not total) to consumers of their products in the form of higher prices, or in
employees being asked to share in and pay a larger portion of the premiums.
Each industry that produces goods and services has an influence on, and in turn
is influenced by, the production of goods and services of other industries. These
interrelationships are captured through a multiplier effect as the demand and supply
trickle over from industry to industry (direct and derived demand) and thus impact total
output, compensation, employment, etc. Multipliers may vary from one region to
another depending on the strength of these interrelationships.
Second Order Costs
The full range of economic impacts includes direct, indirect, and induced costs of
regulation:
• Direct costs consist of economic activity contained exclusively within the
designated sector(s). This includes all expenditures made and all people
employed.
• Indirect costs define the creation of additional economic activity that results
from linked businesses, suppliers of goods and services, and provision of
operating inputs.
• Induced costs measure the consumption expenditures of direct and indirect
sector employees. Examples of induced costs include employees’ expenditures
on items such as retail purchases, housing, banking, medical services, and
insurance.
The total direct, indirect, and induced costs of regulation arising due to the
multiplier effect are presented in four ways:
• Output accounts for total revenues lost including all sources of inome for a given
time period for an industry in dollars. This is the best overall measure of
15
business and economic activity lost because it is the measure most firms use to
determine current activity levels.
• Employment demonstrates the number of jobs lost and is calculated in a full-
time equivalent employment value on an annual basis.
• Indirect Business Taxes consist of property taxes, excise taxes, fees, licenses,
and sales taxes that would have been paid by businesses. While all taxes during
the normal operation of businesses are included, taxes on profits or income are
not included.
• Labor Income includes all forms of employee compensation that would have
been paid by employers (e.g., total payroll costs including benefits, wages and
salaries of workers, health and life insurance, retirement payments, non-cash
compensation), and proprietary income (e.g., self employment income, income
received by private business owners including doctors, lawyers).
Methodology to Derive Second Order Costs
The primary model used for this analysis was IMPLAN. It provides modeling
based on data and tools to assess economic impacts at the state, multi-county, and
county levels. Widely recognized and used nationally and regionally, IMPLAN has more
than 1,500 active users in the USA and internationally. These include clients in federal
and state government, universities, and private sector consultants.
Minnesota IMPLAN Group, Inc (MIG, Inc) are the developers of the IMPLAN®
economic impact modeling system. IMPLAN® is used to create complete, extremely
detailed Social Accounting Matrices and Multiplier Models of local economies. MIG, Inc.
provides software tools, region-specific data, and technical support to enable users to
make in-depth examinations of state, multi-county, county or sub-county, and
metropolitan regional economies.
The benefit of using input-output models, including IMPLAN, is that they help
evaluate the effects of industries on each other based on the supposition that industries
use the outputs of other industries as inputs. Some other models measuring economic
activity examine only the total output or employment of an industry, and not the dual
causality that may run both ways. The use of an input-output model provides a much
more comprehensive view of the inter-related economic impacts. It examines economic
relationships between businesses and between business and consumers. This impact
analysis then measures changes in any one or several economic variables on an entire
economy. IMPLAN data can be used to compute economic impact at the national,
state, regional, and county levels. Of particular interest are industry output,
employment, value added (as measured by employee compensation, proprietary
income, other property type income, and indirect business taxes), and final demand of
institutions (i.e., households, federal government, state and local governments,
businesses).
16
The multiplier effect for sales and employment reflects the increased economic
activity that comes from sales being generated, and expenses being incurred, by a
business. When a business generates sales, it must use some of that money to
purchase other goods and other services and to hire people to meet the demand for its
products and services. Purchases made by the business represent sales to other
firms who must then also purchase goods and services and hire people to meet their
new demand. The additional hiring to meet demand means more people will have
income which they will use to purchase goods and services for their households. All of
this brings added sales to firms in the community. The net effect is that sales dollars
are recycled in the community through this process of sales requiring additional
purchases and employment, which results in sales for other firms who must use that
money to make their own purchases and hire people.5
The IMPLAN model can be used to quantify the multiplier effect that occurs when
new output or employment is added in the geographical area via the designated
economic activities. The multiplier effect is generated when new output or employment
is added in one sector, but generates additional output or employment in other sectors
that supply goods and services (indirect impact) and consumer services to employees
(induced impact).
The largest component of final demand is household consumption. It includes all
payments made by households to all industries for personal consumption of goods and
services. Part of total labor income may not be available for spending since it may be
used to pay personal taxes, principal and interest on loans, credit card payments, etc. It
is also expected that spending patterns will vary from one income level to another. For
example at the lower income levels, higher proportional spending takes place on food,
clothing, and shelter. At the higher income levels, disposable income is higher for
luxury spending.
Findings of Second Order Costs
The findings of the IMPLAN analyses are presented in Appendix 7. The study
separates the impact into the four categories of output, employment, labor income, and
indirect business taxes. It further separates the impact in each category into the major
industrial sectors such as manufacturing, wholesaling, retailing, real estate, professional
services, administrative, education, health, arts/entertainment/recreation,
accommodations/food services, other, farming, federal, and state/local.
5
For example, assume Company A receives a new order for $1,000 worth of its products, and the raw materials going into
those products cost it $700. In order to fill the order, Company A will have to purchase the $700 in raw materials to make those
goods from another company (Company B). That $700 becomes new business for Company B, and it will have to purchase
some amount from its supplier (Company C) so it can fill the order from Company A. Then, Company C will have to purchase
materials from its supplier (Company D) to fill the order from Company B—and this cycle could continue on. Furthermore,
Companies A, B, C, etc. may have to employ more people to fill the orders they receive (or have them work longer), and that
results in additional wages for new/existing employees. These employees will now have more money to spend for their
personal use, and their purchases create new orders for a variety of businesses within the area.
17
The direct regulatory cost of $176.966 billion results in a total loss of output of
$492.994 billion for the State of California (after including indirect and induced costs).
The distribution of the output loss is the highest for the professional services sector. In
terms of employment this output loss is equivalent to the loss of 3.8 million jobs for the
state. A loss of 3.8 million jobs represents 10% of the total population of California. In
terms of labor income, the total loss to the state from the regulatory cost is $210.471
billion. Finally the indirect business taxes that would have been generated due to the
output lost arising from the regulatory cost is $16.024 billion.
Summary and Conclusions
The total loss of gross state output for California (due to direct, indirect, and
induced costs) of $492.994 billion translates into a total cost per household of
$38,446.76 per household, or $13,052.05 per resident (See Appendix 11). The total
cost per household comes close to the median household income for California. The
quality of life and living standards for every household could have been much higher
were the output not lost due to the cost of regulation.
The study compares the total cost due to regulation in California to the various
expenditures by the various state agencies and their budgets. Appendix 12 presents
the general fund and special fund and measures the total cost of regulation in California
in relation to the general fund.
The total general and special fund revenues to the state of California
were$108.545 billion for 2005-06 and $120.132 billion for 2006-07. The total regulatory
cost of $492.994 billion in lost output is four to four and a half times the total budget for
the state of California, and almost five to six times the general fund alone. Further,
given the total gross state output of $1.6 trillion for California in 2007, the total lost
output from regulatory costs is almost a third.
Appendix 13 presents the general fund expenditures for various agencies and
departments in the California government and then presents how the indirect business
taxes totaling $16.024 billion (that would have been generated from the lost output due
to the regulatory cost) relate to these as a percentage. These indirect business taxes
lost could have helped fund many of the state’s departmental budgets. As an example,
the indirect business taxes lost are 60 times the budget of the Office of Emergency
Services, and would have paid for almost half the budget of the Department of
Education.
Most importantly, it helps to understand what these costs mean to the small
business in California. The total cost of regulation was $134,122.48 per small business
in California, indirect business taxes not generated or lost were $4,359.55 per small
business, labor income lost was $57,260.15 per small business, and finally roughly one
job lost per small business (See Appendix 14).
Finally, the study presents percentages of consumer spending that are part of the
income before taxes and relate the labor income lost for each item of spending. This
18
labor income lost results in consumer spending foregone due to the regulatory cost.
Ordinarily this labor income lost due to the cost of regulation would have been spent by
the consumers on a wide variety of items such as food, clothes, entertainment,
healthcare, etc. As an example, currently consumers spend 5.35% of their before tax
income on food (see Appendix 15). The total labor income lost due to the regulatory
cost is $210.471 billion. Of this 5.35% which is $11.258 billion would have likely been
spent on food at home. Similarly how the labor income lost would have been spent on
shelter, utilities, fuels, public services, household operations, medical supplies,
transportation, entertainment etc. can be found in Appendix 15. The cost of regulation
has a huge impact on the consumer spending in California. Lost spending on food
totals $20.3 billion, on drugs and medical supplies totals $1.8 billion, on transportation
$32.1 billion, on entertainment $9.4 billion, among other items of consumer spending.
19
PRIOR RESEARCH AND WORK
Substantial research exists at both the federal and state levels that attempts to
understand, measure, describe, and articulate the impact that regulation may have on
small business and the resulting loss to the economy. Most studies are qualitative –
they describe the impact of regulation on small business, but do not quantify such an
impact. This section presents a comprehensive review of all these studies and all prior
work by grouping them into three categories based on the type of research they
undertake: The Costs of Regulation, Cost of State Taxes and Compliance, and
Ranking of States by Cost.
Studies on the Costs of Regulation
Hazilla and Kopp (1990). They provide estimates of the indirect effects of
environmental regulations as well as the dynamic consequences. Their evidence
suggests that both of these costs are substantial.
Crain (2005). He measures the impact of federal regulatory costs on small
business. Updating previous research by Hopkins (1995) and Crain and Hopkins
(2001), Crain finds that the burden of federal regulation falls disproportionally on smaller
firms relative to larger firms. The results are consistent with Hopkins (1995) and Crain
and Hopkins (2001). The Hopkins (1995) study attempted to identify and document
federal regulatory compliance costs using data until 1992 and made cost projections
until 2000. Crain and Hopkins (2001) extended and updated the Hopkins (1995) study
with actual estimates of the regulatory burden in 2000. Crain (2005) shows the cost of
federal regulation to small business totals $1.1 trillion in 2004 or 11% of national
income. This cost was more than half of total U.S. federal government receipts that
equaled 18% of the economy. Crain also shows that while the average cost per
employee is $5,633, such cost is $7,647 per employee in firms smaller than 20
employees in contrast to $5,282 per employee for large firms that have more than 500
employees. It is important to note that none of the studies that asses the cost of federal
regulation make any attempts to measure the benefits of regulation and hence the net
cost. See Appendix 5.
Crain first measures federal regulatory costs by allocating the total impact into
those arising due to economic regulation, workplace regulation, environmental
regulation, and finally tax compliance. Crain also distributes the impact of federal
regulation into five major sectors of the US economy – manufacturing, trade (wholesale
and retail), services, healthcare, and other (anything not included in the previous four).
Finally Crain analyzes the results by firm size where small firms are those with fewer
than 20 employees, medium sized firms with between 20-499 employees, and large
firms with 500 or more employees.
The sector analysis reveals that small firms are burdened almost twice as much
as medium and large sized firms for the manufacturing sector, but the burden is similar
20
for all firms in the services. Crain and Hopkins (2001) show that small firms in the
manufacturing sector pay 60% more than their larger counterparts. Crain (2005) also
shows that smaller firms pay disproportionally more for environmental regulations
(364% more), and for tax compliance (67% more) than larger firms. The cost of
economic regulation, however, is highest for large firms and increases with firm size. In
contrast, the cost of workplace regulation falls most heavily on medium sized firms.
Overall, small firms bear a disproportional cost of the federal regulatory burden. Small
firms pay almost 45% more per employee.
The Crain (2005) study evaluates data from federal taxing and spending
programs, the annual federal budget process, and the Budget of the USA. In contrast,
we were unable to find anything to parallel the Executive Order 11821 in 1974, or the
federal “Regulatory Right-to-Know Act” from 2000 that requires the Office of
Management and Budget to make the costs and benefits of federal regulation widely
available and transparent to the extent possible.
Crain points out that one must be careful to differentiate regulatory accounting
from fiscal accounting. Government fiscal programs are transparent in that one can
easily measure the cash flows tied to government tax receipts and agency
expenditures. Regulatory costs and benefits, in contrast, are not that easy to identify or
understand since these are not reflected in any governmental cash flow. While the
resources employed by government agencies to collect tax receipts or other fees are
explicit and constitute a cost easy to follow, the indirect cost borne by private enterprise
and individuals due to such activities over and above the receipts is not easily followed.
In this sense, this study does not attempt to measure the explicit cost of those
regulating (e.g. the cost to payroll), but rather the cost to those being regulated – both
explicit and implicit. This then leads to the cost estimates being conservative and
understated relative to the total cost of state regulation incurred.
Previous studies exist that attempt to rank states based on their perceived
regulatory burden. These include John D. Byars, Robert E. McCormick, and T. Bruce
Yandle, Economic Freedom in America's 50 States: A 1999 Analysis, State Policy
Network, 1999, and Ying Huang, Robert E. McCormick, and Lawrence McQuillen, U.S.
Economic Freedom Index: 2004 Report, Pacific Research Institute, 2004 (see Appendix
2 for the rankings). None of the previous studies, however, identify any cost estimates.
Studies on the Cost of State Taxes and Compliance
In 2001 the USA had a corporate tax rate of 39% which was the sixth highest
among all Organization of Economic Co-operation and Development (OECD) countries.
As other countries revised their corporate income tax rates downward, the USA did not.
As a result, the USA has the highest corporate income tax rate in the world.
Compounded with outsourcing of jobs due to lower labor costs overseas, US business
are faced with greater burden.
Gupta and Mills (2003). They investigated the extent to which different state tax
rules affect state revenue and inbound investment, how taxpayers respond to
21
differences in state tax rules, and how such differences affect the burden of complying
with state taxes. They argue that different states adopt varying tax policies and
practices to pursue strategies of economic growth and in-state investment, sometimes
at the expense of other states.
The sample employed in their study shows that state tax compliance costs for the
largest 1,000 public firms range from $290 to $335 million in the aggregate, compared
with about $900 to $1,130 million for federal compliance costs. The authors note that on
a relative basis, state compliance costs are about 2.9 percent of the current state
income tax expense of these corporations, or about twice the relative federal
compliance cost burden of 1.4 percent of current federal income tax expense.
Consistent with expectations, the study finds that state compliance costs indeed
increase in the number of states in which a firm files state income tax returns and in the
number of entities, even after controlling for firm size and various firm-specific variables
that serve as proxies for state tax complexity. The authors believe that these results
provide evidence that the lack of conformity in state corporate tax regimes increases
compliance cost burdens. These results, together with the recent evidence on the labor,
investment, and revenue effects of state corporate income tax rules and the theoretical
work on tax competition, further reinforce the notion that competition among the states,
unlike competition among firms, is welfare-reducing rather than welfare-enhancing.
Gupta and Mills (2003) show that on average, the sample firms spend $258,000
on state compliance costs and $840,000 on federal compliance costs. When the tax
directors of corporations were asked for suggestions for simplifying federal or state
compliance, they most frequently suggested requiring conformity between the state and
federal income tax systems, and uniformity among state systems. Nineteen
respondents recommended a complete piggyback whereby the federal government
should define and enforce taxable income and collect and remit tax to the states at each
state's tax rate. Twenty-seven respondents recommended requiring uniformity of states'
apportionment formula (Slemrod and Blumenthal, 1993, p. 10). These sentiments were
repeated by respondents to Slemrod and Venkatesh's (2002) survey of large and mid-
sized businesses.
Corroborating these concerns, the study finds that the lack of uniformity among
the states indeed increases corporations' compliance cost burdens. First, in terms of
magnitude, they estimate that income tax compliance for large firms is about twice as
costly (as a percentage of their income tax expense) at the state level than at the
federal level, which provides prima facie evidence that the lack of uniformity is costly.
Second, in regression models they find that such costs increase in the number of states
in which a firm does business and the number of entities. Alternatively, this result holds
for the number of state tax returns filed. The model includes several firm-specific control
variables including industry membership, asset composition, and operational
characteristics that capture important sources of conformity among state tax regimes.
They conclude from these results that state income tax compliance costs are largely
driven by complexity and lack of conformity.
22
This finding is consistent with corporate tax directors' suggestions that the most
important simplification would be more uniformity. Combining their results with the
recent evidence on the labor, investment, and revenue effects of state corporate income
tax rules reinforces the notion that competition among the states, unlike competition
among firms, is welfare-reducing rather than welfare-enhancing.
Bruce and Gurley (2005), They note: “We find convincing evidence that marginal
tax rates have important effects on decisions to enter or remain in entrepreneurial
activity.” They studied the relative tax costs of wage earnings versus earnings from
entrepreneurship, and concluded, “Taken together, our empirical results suggest that
policies aimed at reducing the relative tax rates on entrepreneurs might lead to
increases in entrepreneurial activity and better chances of survival. Additionally, our
results indicate that equal-rate cuts in tax rates on both wage and entrepreneurship
incomes could yield similar results. Conversely, equal-rate increases in tax rates on
both sources of incomes would most likely result in reduced rates of entrepreneurship
entry and increased rates of entrepreneurial exit.” This implies to raise the level of
entrepreneurship, it is best to reduce the cost of entrepreneurship.
Vedder (2003). Using an econometric model, he measured the net domestic
migration (not counting international) across the USA since 1990 and documents that
low tax states witnessed a net in-migration in contrast to a vast out-migration for high
tax states. He concluded that high taxes discourage economic growth, reduce the
quality of life, and promote out-migration. Vedder also noted that a 1995 report for the
Joint Economic Committee of the US Congress shows that low tax states grew 33%
faster than high tax states from 1960 to 1993 and that state and local taxes equivalent
to 1% of personal income reduces personal income growth by 3.5%.
The Joint Economic Committee in Congress Report released on May 6, 2003,
entitled “How the Top Individual Income Tax Rate Affects Small Business.” This report
argues:
• “Taxpayers in the highest income bracket are often entrepreneurs and small
business owners, not just highly-paid executives or people living off their
investments. Small business owners typically report their profits on their
individual income tax returns, so the individual income tax is effectively the small
business tax.”
• “Small businesses generally pay their income taxes through the individual
income tax systems, not the corporate tax system. Sole proprietorships,
partnerships, and S-Corporations are the three main organizational forms chosen
by small business owners.”
• “Economists who have studied the effects of taxes on sole proprietorships have
found that high marginal tax rates discourage entrepreneurs from investing in
new capital equipment and, conversely, that reducing taxes encourages new
investment.”
23
• “At higher marginal tax rates, hiring employees can become a less attractive
proposition as a higher fraction of any additional income that a new hire might
generate for the business is taxed and diverted to the federal government.”
• “Investment also promotes small business growth, since how much a worker can
produce for a company depends on the amount and quality of the equipment that
the worker has to work with. That is why when low marginal tax rates spur a
business to make new capital investments in software, computers, or machinery,
for example, that company’s workers become more productive, causing the
company to grow. One study has shown that when the marginal tax rate for small
businesses is reduced by 10 percent, those businesses’ gross receipts increase
by over 8 percent.”
The Tax Foundation Study (2005). The Tax Foundation, in a study, shows that
74% of the top 1% earners in the USA had business activity and that business owners
bear the major share of the personal income tax burden. Specifically they estimated that
54.3% of all personal income taxes were paid by business owners in 2004. Becsi
(1996) used data from 1960-1992 and showed that high marginal tax rates and high
overall tax levels were negatively related to state economic growth.
In 2005, tax payers paid roughly $1.2 trillion in federal income taxes. But
America’s tax burden is more than just the amount of tax paid. In the last century the
cost of tax compliance has grown tremendously. This is due partly to the inherent
difficulty of taxing income, but also because of growing non-economic demands
lawmakers place on the tax code. In 2005 individuals, businesses and nonprofits will
spend an estimated 6 billion hours complying with the federal income tax code, with an
estimated compliance cost of over $265.1 billion. Projections show that by 2015 the
compliance cost will grow to $482.7 billion.
The burden of tax compliance does not fall evenly on taxpayers. It varies by type
of taxpayer, income level and state. In 2005, businesses paid the majority of tax
compliance costs, totaling nearly $148 billion or 56 percent of total compliance costs.
The compliance costs for individuals totaled $111 billion or 42 percent, and non-profits
will bear nearly $7 billion or 2.5 percent of the total. When examined by income level,
compliance cost was found to be highly regressive, taking a larger toll on low-income
taxpayers as a percentage of income than high-income taxpayers. On the low end,
taxpayers with adjusted gross income (AGI) under $20,000 incur a compliance cost
equal to 5.9 percent of income while the compliance cost incurred by taxpayers with
AGI over $200,000 amounts to just 0.5 percent of income.
State-by-state estimates of the 2005 federal compliance cost also vary widely
because state populations and economies differ so significantly. On a per capita basis,
Wyoming ($1,242), Delaware ($1,181) and Colorado ($1,167) face the highest
compliance cost while Mississippi ($658), West Virginia ($689), and Tennessee ($705)
face the lowest. Measured per $1,000 of income, Montana ($38), Utah ($37), and
Wyoming ($33) face the highest compliance cost while California ($19), Connecticut
($20) and Massachusetts ($21) face the lowest. For more details see Appendix 3.
24
Studies on State Rankings and Cost Concerns
Small Business Survival Index 2007: Keating (2007). This study produced a
small business survival index by ranking the policy environment for entrepreneurship
across the USA (from the friendliest to the least friendly). Keating argued that relative to
personal consumption expenditures, private investment and entrepreneurship have a
much larger and more significant impact on output. In this sense economic risk taking
drives innovation, invention, efficiency and productivity in the economy.
According to Keating the biggest impediments to investment and
entrepreneurship are bad public policy, poor public policy environment, and government
imposed costs directly and indirectly affecting small business and entrepreneurs. He
constructed the small business survival index using 31 different government imposed
and related costs that affect small business. These costs include those arising due to
personal income taxes, individual capital gains taxes, corporate income taxes, corporate
capital gains taxes, additional income taxes on S-Corporations, alternative minimum
taxes for individuals, alternative minimum taxes for corporations, indexing of personal
income tax rates, property taxes, sales/gross receipts/excise taxes, death taxes,
unemployment tax rates, health savings accounts, healthcare regulation, electricity
costs, worker compensation costs, total crime rate, right to work costs, number of
government employees, tax limitation states, gas taxes, internet taxes, state minimum
wage, state legal liability costs, regulatory flexibility, trend in state and local government
spending, per capital state and local government spending, protecting private property,
and highway cost efficiency.
State Rankings
Across the nation, California ranked 49th among all states ranked from the
friendliest to the least friendly for entrepreneurship in the Small Business Survival Index
for 2007 with a score of 77.985. This compared to first ranked South Dakota with a
score of 25.914 and 50th ranked New Jersey with a score of 79.231. California ranked
poorly among other categories as well (see Appendix 1) –
• the worst state ranking for Top Personal Income Tax Rates
• the worst state ranking for Top Capital Gains Tax Rates
• 42nd for State Rankings of Top Corporate Income Tax Rates
• 43rd for State Rankings of Top Corporate Capital Gains Tax Rates
• 13th for State Rankings of State and Local Property Taxes
• 29th for State Rankings of State and Local Sales
• 1st for State Rankings of Adjusted Unemployment Taxes
• 43rd for State Rankings of Number of Health Insurance Mandates
25
• 45th for State Rankings of Electric Utility Costs
• 47th for State Rankings of Workers’ Compensation Benefits Per $100 of Covered
Wages
• 27th for State Rankings of Crime Rate
• 9th for State Rankings of the Number of Government Employees
• worst state ranking for State Rankings of State Gas Taxes
• 45th for State Rankings of State and Local Government Five-Year Spending
Trend (1999-2000 to 2004-2005)
• 47th for State Rankings of Per Capita State and Local Government Expenditures
(2004-2005)
• 44th for State Rankings of Highway Cost Effectiveness, 2005.
Cost Concerns
Small Business Survival Index 2007 – Keating (2007): On Health Care
Regulations. The Council for Affordable Health Insurance reported in “Health Insurance
Mandates in the States 2006” that “mandated benefits currently increase the cost of
basic health coverage from a little less than 20% to more than 50%, depending on the
state.”
An econometric analysis released in 2006, written by William J. Congdon,
Amanda Kowalski and Mark H. Showalter, was titled “State Health Insurance
Regulations and the Price of High-Deductible Policies.” The report looked at the impact
of service and provider mandates, any-willing provider regulations, community rating,
and guaranteed issue on family and individual policies with high deductibles in the non-
group market in 42 states. The findings included:
A strong statistical relationship exists between regulation and insurance prices.
Specifically, “the presence of regulations tends to be associated with less generous
insurance (higher coinsurance rates, higher deductibles, higher stoploss limits) as well
as higher prices.”
Each mandate raises “the price of an individual policy by about 0.4 percent; for a
family policy, it increases by about 0.5 percent.”
Community rating raises “the price of an individual policy by 20.3 percent. It
raises the price of a family policy by 27.3 percent.”
Guaranteed issue raises “the price of an individual policy by 114.5 percent. For
family policies, the price increase is 94.2 percent.”
The SBA Office of Advocacy’s “Frequently Asked Questions” (August 2007)
reported: “According to a National Federation of Independent Business membership
26
survey, the cost and availability of health insurance are a top small business issue.
Aspects of insurance that drive small business concern are premium increases and
administrative costs. Advocacy research shows that: (1) insurers of small health plans
have higher administrative expenses than those that insure larger group plans, and (2)
employees at small firms are less likely to have coverage than the employees of larger
entities.”
Small Business Survival Index 2007 – Keating (2007): On the Minimum Wage.
The Wall Street Journal (“Job Slayers,” August 29, 2005), recently reported: “For
decades economists have piled up studies concluding that a higher minimum wage
destroys jobs for the most vulnerable population: uneducated and unskilled workers.
The Journal of Economic Literature has established a rule of thumb that a 10% increase
in the minimum wage leads to roughly a 2% hike in teen unemployment.”
The Employment Policies Institute (EPI) released a May 2006 study by
economist Joseph Sabia, University of Georgia, which was titled “The Effect of Minimum
Wage Increases on Retail and Small Business Employment.” This was a response to a
study by the Fiscal Policy Institute (FPI) claiming that increases in the minimum wage at
the state level do not have negative employment effects. The overview of the EPI study
explained:
“While the FPI study has been frequently cited by supporters of increases in the
minimum wage, the study is based on faulty statistical methods, and its results provide
an inaccurate picture of the effect of state-level minimum wage increases. This paper,
by Dr. Joseph Sabia of the University of Georgia, presents a more careful and
methodologically rigorous analysis of state-level minimum wage increases. His results
confirm the consensus economic opinion that increases in the minimum wage decrease
employment, particularly for low-skilled and entry-level employees.
“Using government data from January 1979 to December 2004, the effect of
minimum wage increases on retail and small business employment is estimated.
Specifically, a 10 percent increase in the minimum wage is associated with a 0.9 to 1.1
percent decline in retail employment and a 0.8 to 1.2 percent reduction in small
business employment.
“These employment effects grow even larger for the low-skilled employees most
affected by minimum wage increases. A 10 percent increase in the minimum wage is
associated with a 2.7 to 4.3 percent decline in teen employment in the retail sector, a 5
percent decline in average retail hours worked by all teenagers, and a 2.8 percent
decline in retail hours worked by teenagers who remain employed in retail jobs.
“These results increase in magnitude when focusing on the effect on small
businesses. A 10 percent increase in the minimum wage is associated with a 4.6 to 9.0
percent decline in teenage employment in small businesses and a 4.8 to 8.8 percent
reduction in hours worked by teens in the retail sector.”
27
SBSI On Workers’ Compensation Costs. In a September 2006 report for the
National Center for Policy Analysis titled “Workers’ Compensation: Rx for Policy
Reform,” N. Michael Helvacian reported: “Though workplaces became much safer in the
20th century, and job-related injuries declined, the soaring claim costs of state-
mandated workers' compensation insurance has offset the decline in injuries. As a
result, employers face increasingly higher insurance premiums and self-insurance
costs, which reached nearly $60 billion in 2000. Although the average cost of workers'
compensation premiums nationwide is less than 3 percent of payroll, premiums vary
widely by industry. In high-risk industries, workers' compensation costs are often greater
than health insurance premiums or Social Security payroll taxes. Workers implicitly pay
part of these costs through reduced wages. Costs are increasing because state
systems provide incentives for employers, employees and others to behave in ways that
cause costs to be higher and workplaces to be less safe than they otherwise could be.”
As for small businesses, Helvacian noted: “Insurance premiums, especially for
small employers, are not fully experience-rated; as a result, firms that improve
workplace safety cannot reap the full rewards and others are not penalized for poor
safety practices.” In addition, he pointed out: “Workers' compensation premium rates
are highly regulated in some states, and insurance markets are not as competitive as
they could be; as a result, many small firms pay more than necessary for coverage. (For
example, average premiums as a percentage of payroll are 50 percent higher for firms
of less than 500 employees than for larger firms.)”
Inc.com reported the following on September 23, 2004: “According to a recent
survey by the National Federation of Independent Business, workers' compensation
ranks as the third biggest problem facing small firms today, with about a third of the
respondents describing it as a critical problem… The issue tends to be localized,
because each state governs workers' compensation premiums differently.” The story
noted later on: “The premiums charged are driven by the number of claims and the
average claim size, which reflects the cost of medical treatment for job-related injuries,
as well as litigation and administrative costs.”
PRI's U.S. Economic Freedom Index 2004: Huang, McCormick, and McQuillan
(2004) This study measured economic freedom across the U.S. states and some of its
effects. They argued that economic freedom is the right of individuals to pursue their
interests through voluntary exchange of private property under a rule of law. They
argued that this freedom forms the foundation of market economies. Subject to a
minimal level of government to provide safety and a stable legal foundation, legislative
or judicial acts that inhibit this right reduce economic freedom. In their paper, they
expected economic freedom to be positively linked, on average, to state annual income
per capita.
Economic freedom expands the opportunities for individuals to use their
knowledge and resources to their best advantage and to keep the fruits of their labor for
personal consumption and future productive investment. More economic freedom is
associated with higher income per capita across the U.S. states. The results are
28
virtually identical if economic freedom rankings are substituted for economic freedom
scores. The statistical analysis shows that a 10-percent improvement in a state's
economic freedom score yields, on average, about a half-percent increase in annual
income per capita.
The authors gathered data on 143 variables per state from 1995 to 2003 that
include tax rates, state spending, occupational licensing, environmental regulations,
income redistribution, right-to-work and prevailing-wage laws, tort reform, and the
number of government agencies, among others. From these they derived five data sets
with calculated sector scores for each state by putting put each variable into one of five
sectors: fiscal (51 variables), regulatory (53), welfare spending (10), government size
(7), and judicial (22). Each state's sector scores were calculated by ranking each
variable within a sector from 1 (most free) to 50 (least free).
In their study California ranked at the very bottom - 49th out of 50 states with an
economic freedom score of 38.75 (New York ranked the lowest with 39.5, Kansas
ranked the highest with 18.18, and Colorado, Virginia, Idaho and Utah rounded off the
top five). Byars, McCormick, and Yandle (1999) perform a similar analysis and their
study ranks California 44th out of 50 states with an economic freedom index score of
6.39. Interestingly, the study finds that the Great Plains and Rocky Mountain states
have the most economic freedom. Virginia ranks high as it does also in the Forbes
rankings as one of the best states for business. As the study noted, many of the
nation's most densely populated states are also some of the least economically free.
This is consistent with leading economic theories of the determinants of regulation.
California ranks as the next to worst. See Appendix 2.
Next, the authors constructed an economic model that equates the level of state
annual income per capita in 2000 as a function of the following state-level variables:
education level (a proxy for human capital as measured by the proportion of the
population with a high-school education or more); average temperature (a proxy for the
work/leisure tradeoff); population density (a proxy for the size of the market and level of
transaction costs as measured by the number of residents per square mile); stock of
wealth (endowments as measured by annual income per capita in 1990); average age
of the population (a proxy for the earnings life-cycle); church membership rate (a proxy
for the work ethic); and the institutional environment as measured by the state's
economic freedom score.
The regression results, robust across specifications, showed that more economic
freedom is associated with higher income per capita across the U.S. states. The results
were virtually identical if economic freedom rankings are substituted for economic
freedom scores. The statistical analysis showed that a 10-percent improvement in a
state's economic freedom score yields, on average, about a half-percent increase in
annual income per capita.
Relative to the freest state, Rhode Island residents suffered the largest reduction
in annual income per capita due to their loss of economic freedom, $3,607, followed by
Hawaii at $2,963, and New York and New Jersey at around $2,400 each (see table 7).
29
The national average was $1,161. This might not sound like much, but over a 40-year
working life at a conservative 3 percent interest rate, this translates into $87,541 that
would have otherwise gone into the pocket of an average working American.
Rhode Island also had the highest effective "oppression tax," 13.17 percent,
followed by Hawaii at 11.36 percent, Maine at 7.61 percent, and New York at 7.45
percent. The national average was 4.42 percent of income. State institutions had a
substantial impact on income levels across the U.S. states. Economic freedom mattered
significantly.
This study is very useful in understanding how lack of economic freedom
especially due to government interference and bad legislation can adversely impact the
per capita income of the residents in that state. California, in this sense, ranks very
poorly – the second least free state in the USA.
The Wall Street Journal Online. A recent article in the Wall Street Journal Online
reported that according to the latest Census Bureau data in 2005, 239,416 more native-
born Americans left the state than moved into the state of California. In the article the
author pointed out that a big part of the story is a tax and regulatory culture that treats
the most productive businesses and workers as if they were ATMs and that the worst
growth killer may well be California's tax system. The business tax rate of 8.8% is the
highest in the West, and its steeply "progressive" personal income tax has an effective
top marginal rate of 10.3%, or second highest in the nation. Cal Tax, the state's
taxpayer advocacy group, reports that the richest 10% of earners pay almost 75% of the
entire income-tax revenue in the state, and most of these are small-business owners,
i.e., the people who create jobs. State finance department office data indicate that the
number of Californians reporting million-dollar incomes fell to 25,000 in 2003 from
44,000 in 2000. That decline has cost the state $9 billion a year in uncollected tax
revenues. California continues to account for about one-sixth of the overall U.S.
economy, and its competitive decline will inevitably hurt everyone.
30
GENERAL CONCLUSIONS AND RECOMMENDATIONS
This study measures and reports the cost of regulation to small business in the
State of California. It employs an original and unique approach using a general
equilibrium framework to identify and measure the cost of regulation as measured by
the loss of economic output to the State’s gross product, after controlling for variables
known to influence output. It also measures second order costs resulting from
regulatory activity by studying the total impact – direct, indirect, and induced. The study
finds that the total cost of regulation to the State of California is $492.994 billion which is
almost five times the State’s general fund budget, and almost a third of the State’s gross
product. The total cost of regulation results in an employment loss of 3.8 million jobs
which is a tenth of the State’s population. Since small business constitute 99.2% of all
employer businesses in California, and all of non-employer business, the regulatory cost
is borne almost completely by small business. The general equilibrium framework
yields the following results:
• The direct cost of the regulatory environment in California is $176.966 billion in
lost gross state output each year. The direct cost does not account for second
order costs.
• The total loss of gross state output for California each year due to direct, indirect,
and induced impact of the regulatory cost is $492.994 billion.
• In terms of employment this total output loss is equivalent to the loss of 3.8
million jobs for the state each year. A loss of 3.8 million jobs represents 10% of
the total population of California. In terms of labor income, the total loss to the
state from the regulatory cost is $210.471 billion. Finally the indirect business
taxes that would have been generated due to the output lost arising from the
regulatory cost is $16.024 billion.
• The total regulatory cost of $492.994 billion is four to four and a half times the
total budget for the state of California, and almost five to six times the general
fund alone. Further, given the total gross state output of $1.6 trillion for California
in 2007, the lost output from regulatory costs is almost a third of the gross state
output.
• The indirect business taxes lost could have helped fund many of the state’s
departmental budgets. As an example, the indirect business taxes lost are 60
times the budget of the Office of Emergency Services, and would have paid for
almost half the budget of the Department of Education.
• The total cost of regulation was $134,122.48 per small business in California in
2007, labor income not created or lost was $57,260.15 per small business,
31
indirect business taxes not generated or lost were $4,359.55 per small business,
and finally roughly one job lost per small business.
• The total regulatory cost of $492.994 billion translates into a total cost per
household of $38,446.76 per household, or $13,052.05 per resident. The total
cost per household comes close to the median household income for California.
This study provides the most comprehensive and complete analysis of the total
regulatory burden in California. The study and findings have implications for policy-
makers and those in charge of the regulatory environment. The results also suggest
that future research should attempt to understand how to minimize the intended and
unintended costs of regulation. Since small businesses are the lifeblood of California’s
economy constituting 99.2% of all employer businesses, efforts to make the regulatory
environment more attractive will make California a more attractive state for doing
business. This in turn will improve the state’s output, employment, labor income,
indirect business taxes, economic climate, quality of life, living standards, and growth
prospects.
32
REFERENCES
Beale, Henry B.R. and King Lin, Impacts of Federal Regulations, Paperwork, and Tax
Requirements on Small Business, SBAHQ-95-C-0023; Microeconomic Applications,
Inc., prepared for the Office of Advocacy, U.S. Small Business Administration,
September, 1998;
Becsi, Zsolt, “Do State and Local Taxes Affect Relative State Economic Growth?”
Economic Review, Federal Reserve bank of Atlanta, March-April 1996
Brock, William A. and David S. Evans, The Economics of Small Businesses: Their Role
and Regulation in the U.S. Economy, Holmes & Meier, New York, NY, 1986, especially
chapters 4 and 5.
Bradford, Stevens C., “Does Size Matter? An Economic Analysis of Small Business
Exemptions from Regulation,” The Journal of Small and Emerging Business Law, 8 (1),
2004, pp. 1-37.
Bruce, Donald and Tami Gurley, “Taxes and Entrepreneurial Activity: An Empirical
Investigation Using Longitudinal Tax Return Data,” Small Business Administration Office
of Advocacy, March 2005.
Byars, John D., Robert E. McCormick, and T. Bruce Yandle, Economic Freedom in
America's 50 States: A 1999 Analysis, State Policy Network, 1999.
Cole, Roland J. and Paul Sommers, Costs of Compliance in Small and Moderate-sized
Businesses, SBA-79-2668, Battelle Human Affairs Research Centers, Seattle, WA,
February, 1980; Improving Economic Analysis of Government Regulations on Small
Business, SBA-2648-OA-79, JACA Corporation, Fort Washington, PA, January, 1981;
Crain, Mark, The Impact of Regulatory Costs on Small Firms, Small Business Research
Summary, 2005.
Crain, Mark and Thomas Hopkins, The Impact of Regulatory Costs on Small Firms, U.S.
Small Business Administration, 2001.
Dean, Thomas J., “Pollution Regulations as a Barrier to the Formation of Small
Manufacturing Establishments: A Longitudinal Analysis,” Office of Advocacy, U.S. Small
Business Administration: Washington, D.C., 1994;
Dean, Thomas J., et al., “Environmental Regulation as a Barrier to the Formation of
Small Manufacturing Establishments: A Longitudinal Analysis,” Journal of
Environmental Economics and Management 40, 2000, pp. 56-75.
Gaston, Robert J. and Sidney L. Carroll, State and Local Regulatory Restrictions as
Fixed Cost Barriers to Small Business Enterprise, SBA-7167-AER-83, Applied
Economics Group, Inc., Knoxville, TN, April, 1984; and, Economies of Scale in
33
Regulatory Compliance: Evidence of the Differential Impacts of Regulation by Firm Size,
SBA-7188-OA-83, Jack Faucett Associates, Chevy Chase, MD, December, 1984.
Gupta, Sanjay and Lillian Mills, Does Disconformity in State Corporate Income Tax
Systems Affect Compliance Cost Burdens? National Tax Journal, June 2003.
Hopkins, Thomas, Profiles of Regulatory Costs. Report to the U.S. Small Business
Administration, U.S. Department of Commerce, National Technical Information Service,
#PB 96128038. November 1995.
Huang, Ying, Robert E. McCormick, and Lawrence McQuillen, U.S. Economic Freedom
Index: 2004 Report, Pacific Research Institute, 2004. However, no estimates of the
costs of state regulations are available.
Hazilla, Michael and Raymond Kopp, “The Social Cost of Environmental Quality
Regulations: A General Equilibrium Analysis,” Journal of Political Economy, Vol. 98 (4),
1990.
Keating, Raymond J., Small Business Survival Index 2007: Ranking the Policy
Environment for Entrepreneurship Across the Nation, Small Business Entrepreneurship
Council, November 2007.
Moody, Scott, Wendy Warcholik, and Scott Hodge, “The Rising Cost of Complying with
the Federal Income Tax,” The Tax Foundation, December 2005.
Staley, Samuel et al., Giving A Leg Up to Bootstrap Entrepreneurship: Expanding
Economic Opportunity in America’s Urban Centers, Los Angeles: Reason Public Policy
Institute, 2001.
The Wall Street Journal Online, Meathead Economics, Hollywood liberals drive
productive Californians to leave the state, Tuesday, February 28, 2006 12:01 a.m. EST
U.S. Office of Management and Budget, Office of Information and Regulatory Affairs
(2005), Draft Report to Congress on the Costs and Benefits of Federal Regulations.
Vedder, Richard, “Taxation and Migration,” The Taxpayers Network, June 2003.
34
Appendix 1. Small Business Survival Index 2007
Table A-1 State Rankings
Rank State SBSI
1 South Dakota 25.914
2 Nevada 31.574
3 Wyoming 37.986
4 Washington 42.832
5 Florida 45.485
6 Michigan 46.073
7 Texas 47.968
8 South Carolina 49.544
9 Virginia 49.996
10 Alabama 50.534
11 Colorado 51.934
12 Georgia 52.734
13 Tennessee 53.121
14 Indiana 53.288
15 Arizona 53.277
16 Mississippi 53.820
17 Alaska 54.356
18 Utah 54.435
19 Missouri 54.681
20 North Dakota 54.795
21 Oklahoma 56.295
22 Kentucky 56.458
23 New Hampshire 56.502
24 Pennsylvania 57.343
25 New Mexico 57.978
26 Illinois 58.375
27 Arkansas 59.197
28 Maryland 59.337
29 Ohio 59.341
30 Kansas 59.853
31 Louisiana 60.066
32 Delaware 60.086
33 Wisconsin 60.183
34 Oregon 60.891
35 Montana 61.552
36 Idaho 51.817
37 Nebraska 63.145
38 Connecticut 64.879
39 North Carolina 65.570
40 West Virginia 66.516
41 Iowa 69.161
35
42 Hawaii 70.416
43 Vermont 71.370
44 Massachusetts 72.055
45 Minnesota 72.096
46 New York 73.189
47 Maine 74.222
48 Rhode Island 75.604
49 California 77.985
50 New Jersey 79.231
51 Dist. Of Columbia 81.905
Table A-2. State Rankings of Top
Personal Income Tax Rates
Top PIT
Rank State Rate
1 Alaska 0
1 Florida 0
1 Nevada 0
1 New Hampshire 0
1 South Dakota 0
1 Tennessee 0
1 Texas 0
1 Washington 0
1 Wyoming 0
10 Illinois 3
11 Pennsylvania 3.07
12 Alabama 3.25
13 Indiana 3.4
14 Louisiana 3.9
15 Michigan 4.35
16 Arizona 4.540
17 Colorado 4.63
18 Maryland 4.75
19 Mississippi 5
19 Connecticut 5
21 New Mexico 5.3
21 Massachusetts 5.3
23 North Dakota 5.54
24 Oklahoma 5.65
25 Virginia 5.75
26 Utah 5.76
27 Iowa 5.837
28 Delaware 5.95
29 Georgia 6
29 Missouri 6
29 Kentucky 6
32 Kansas 6.45
33 West Virginia 6.5
36
34 Ohio 6.555
35 Wisconsin 6.75
36 Nebraska 6.84
37 New York 6.85
38 Montana 6.9
39 South Carolina 7.000
39 Arkansas 7
41 Idaho 7.8
42 Minnesota 7.85
43 North Carolina 8.000
44 Hawaii 8.25
45 Maine 8.5
Dist. Of
45 Columbia 8.5
47 New Jersey 8.96
48 Oregon 9
49 Vermont 9.5
50 Rhode Island 9.9
51 California 10.3
Table A-3. State Rankings of Top
Capital Gains Tax Rates
Rank State CG Rate
1 Alaska 0
1 Florida 0
1 Nevada 0
1 New Hampshire 0
1 South Dakota 0
1 Tennessee 0
1 Texas 0
1 Washington 0
1 Wyoming 0
10 New Mexico 2.65
11 Wisconsin 2.7
12 Illinois 3
13 Pennsylvania 3.07
14 Indiana 3.4
15 South Carolina 3.92
16 Alabama 4.250
17 Michigan 4.35
18 Arizona 4.54
19 Colorado 4.63
20 Maryland 4.75
21 Arkansas 4.9
22 Connecticut 5
22 Mississippi 5
22 Rhode Island 5
25 Louisiana 5.1
37
26 Massachusetts 5.3
27 North Dakota 5.54
28 Oklahoma 5.65
29 Vermont 5.7
30 Virginia 5.75
31 Delaware 5.95
32 Georgia 6
32 Kentucky 6
32 Missouri 6
35 Kansas 6.45
36 Utah 6.46
37 West Virginia 6.5
38 Ohio 6.555
39 Nebraska 6.840
40 New York 6.85
41 Montana 6.9
42 Hawaii 7.25
43 Iowa 7.633
44 Idaho 7.8
45 Minnesota 7.85
46 North Carolina 8
47 Dist. Of Columbia 8.5
48 Maine 8.5
49 New Jersey 8.97
50 Oregon 9
51 California 10.3
Table A-4. State Rankings of Top
Corporate Income Tax Rates
Rank State Top CIT Rate
1 Nevada 0
1 South Dakota 0
1 Washington 0
1 Wyoming 0
5 Michigan 1.9
6 Alabama 4.225
7 Texas 4.5
8 Colorado 4.63
9 Mississippi 5
9 South Carolina 5
9 Utah 5
12 Ohio 5.1
13 Missouri 5.156
14 Louisiana 5.2
15 Florida 5.5
16 Georgia 6.000
16 Kentucky 6
16 Oklahoma 6
38
16 Virginia 6
20 Hawaii 6.4
21 Arkansas 6.5
21 Tennessee 6.5
23 Oregon 6.6
24 Montana 6.75
25 North Carolina 6.9
26 Arizona 6.968
27 Maryland 7
27 North Dakota 7
29 Illinois 7.3
30 Kansas 7.35
31 Connecticut 7.5
32 Idaho 7.6
32 New Mexico 7.6
34 Nebraska 7.81
35 Wisconsin 7.9
36 Indiana 8.5
36 New Hampshire 8.5
36 Vermont 8.5
39 Delaware 8.700
40 West Virginia 8.75
41 New York 8.775
42 California 8.84
43 Maine 8.930
44 Rhode Island 9
45 New Jersey 9.36
46 Alaska 9.4
47 Massachusetts 9.5
48 Minnesota 9.8
49 Iowa 9.9
50 Dist. Of Columbia 9.975
51 Pennsylvania 9.99
Table A-5. State Rankings of Top
Corporate Capital Gains Tax Rates
Rank State Corp CG Rate
1 Nevada 0
1 South Dakota 0
1 Washington 0
1 Wyoming 0
5 Michigan 1.9
6 Hawaii 4
7 Alabama 4.225
8 Alaska 4.5
8 Texas 4.5
10 Colorado 4.63
11 Mississippi 5
39
11 South Carolina 5
11 Utah 5
14 Ohio 5.1
15 Missouri 5.156
16 Louisiana 5.200
17 Florida 5.5
18 Georgia 6
18 Kentucky 6
18 Oklahoma 6
18 Virginia 6
22 Arkansas 6.5
22 Tennessee 6.5
24 Oregon 6.6
25 Montana 6.75
26 North Carolina 6.9
27 Arizona 6.968
28 Maryland 7
28 North Dakota 7
30 Illinois 7.3
31 Kansas 7.35
32 Connecticut 7.5
33 Idaho 7.6
33 New Mexico 7.6
35 Nebraska 7.81
36 Wisconsin 7.9
37 Indiana 8.5
37 New Hampshire 8.5
37 Vermont 8.500
40 Delaware 8.7
41 West Virginia 8.75
42 New York 8.775
43 California 8.840
44 Maine 8.93
45 Rhode Island 9
46 New Jersey 9.36
47 Massachusetts 9.5
48 Minnesota 9.8
49 Iowa 9.9
50 Dist. Of Columbia 9.975
51 Pennsylvania 9.99
Table A-6. State Rankings of State and
Local Property Taxes
Rank State Prop. Taxes
1 Alabama 1.33
2 Delaware 1.56
3 Arkansas 1.58
4 New Mexico 1.61
40
5 Oklahoma 1.62
6 Hawaii 1.86
7 Kentucky 1.9
8 West Virginia 2.1
9 Tennessee 2.11
10 Louisiana 2.19
11 Maryland 2.38
12 North Carolina 2.4
13 California 2.55
14 Missouri 2.59
15 Utah 2.63
16 Nevada 2.690
17 Mississippi 2.7
18 Minnesota 2.75
19 Colorado 2.82
20 Idaho 2.83
21 Arizona 2.87
22 South Dakota 2.9
23 Georgia 2.91
24 Virginia 2.96
25 Washington 2.97
26 Oregon 3.03
27 Pennsylvania 3.09
28 South Carolina 3.11
29 North Dakota 3.12
30 Ohio 3.28
31 Florida 3.37
32 Kansas 3.42
33 Iowa 3.52
34 Nebraska 3.63
35 Montana 3.68
36 Dist. Of Columbia 3.69
37 Massachusetts 3.7
38 Alaska 3.78
39 Michigan 3.900
40 Indiana 3.91
41 Illinois 4.04
42 Texas 4.07
43 Wisconsin 4.240
44 Connecticut 4.31
45 New York 4.42
46 Wyoming 4.69
47 Rhode Island 4.8
48 New Jersey 5.03
49 Vermont 5.19
50 Maine 5.3
51 New Hampshire 5.37
41
Table A-7. State Rankings of State and
Local Sales, Gross Receipts and
Excise Taxes
Rank State SGRE Taxes
1 Oregon 0.5
2 Delaware 0.93
3 Montana 0.99
4 New Hampshire 1.16
5 Alaska 1.53
6 Massachusetts 1.87
7 Maryland 2.13
8 Virginia 2.37
9 New Jersey 2.55
10 Pennsylvania 2.71
11 Maine 2.79
12 Wisconsin 2.8
12 Connecticut 2.8
14 Iowa 2.89
15 Colorado 2.92
16 North Carolina 3.000
17 Ohio 3.03
18 South Carolina 3.12
19 Idaho 3.2
20 Michigan 3.23
20 Minnesota 3.23
22 Illinois 3.26
22 Georgia 3.26
24 Oklahoma 3.28
25 Rhode Island 3.31
25 Indiana 3.31
27 Kansas 3.36
28 North Dakota 3.37
29 California 3.42
30 Vermont 3.44
31 Missouri 3.47
31 Nebraska 3.47
33 Kentucky 3.52
34 New York 3.55
35 Texas 3.79
36 Alabama 3.8
37 Utah 3.92
38 West Virginia 3.95
39 Wyoming 3.960
39 South Dakota 3.96
41 Dist. Of Columbia 4.06
42 Mississippi 4.32
43 Florida 4.470
44 Arizona 4.5
45 Tennessee 4.63
42
46 New Mexico 4.9
47 Arkansas 5.24
48 Nevada 5.66
49 Washington 5.78
50 Hawaii 6.23
51 Louisiana 6.36
Table A-8. State Rankings of Adjusted
Unemployment Taxes
Rank State Unemp. Tax
1 California 0.86
2 Dist. Of Columbia 0.97
3 Arizona 1.04
4 Florida 1.06
5 Indiana 1.11
6 Virginia 1.2
7 Georgia 1.24
7 Mississippi 1.24
9 South Carolina 1.28
10 Colorado 1.3
11 Louisiana 1.32
11 New Hampshire 1.32
13 Nebraska 1.42
14 Vermont 1.43
15 Alabama 1.44
16 Maryland 1.450
17 New York 1.58
18 Delaware 1.67
19 Kansas 1.69
20 Connecticut 1.76
21 Maine 1.84
22 Missouri 1.85
23 Texas 1.89
24 West Virginia 1.91
25 South Dakota 1.95
26 Pennsylvania 1.96
27 Tennessee 2.04
28 Illinois 2.08
29 Ohio 2.17
30 Michigan 2.25
31 Kentucky 2.27
32 Oklahoma 2.35
33 Wisconsin 2.54
34 North Carolina 2.86
35 New Mexico 2.96
36 New Jersey 3.16
37 Arkansas 3.23
38 Massachusetts 3.24
43
39 Rhode Island 3.380
40 Nevada 3.69
41 Alaska 3.71
42 Oregon 4.06
43 Washington 4.480
44 Idaho 4.68
45 Montana 4.72
46 Wyoming 4.73
47 Hawaii 4.93
48 Iowa 5.29
49 North Dakota 5.31
50 Minnesota 5.6
51 Utah 6.65
Table A-9. State Rankings of
Number of Health Insurance
Mandates
Hlth
Rank State Mand
1 Idaho 0.7
2 Dist. Of Columbia 0.85
3 Alabama 0.9
4 Hawaii 1.1
4 Utah 1.1
6 Iowa 1.15
7 Delaware 1.2
8 Michigan 1.3
8 Ohio 1.3
8 Vermont 1.3
11 Alaska 1.4
11 South Carolina 1.4
13 Arizona 1.45
13 Mississippi 1.45
15 South Dakota 1.5
16 Nebraska 1.550
16 Wisconsin 1.55
18 Oregon 1.6
18 Wyoming 1.6
20 Kentucky 1.65
20 North Dakota 1.65
22 Indiana 1.7
23 Oklahoma 1.8
23 West Virginia 1.8
25 Kansas 1.85
26 New Hampshire 1.9
26 Pennsylvania 1.9
28 Georgia 1.95
28 Illinois 1.95
44
28 Missouri 1.95
28 Montana 1.95
32 Arkansas 2
32 Tennessee 2
34 New Jersey 2.05
35 Louisiana 2.15
35 Massachusetts 2.15
35 Rhode Island 2.15
38 New Mexico 2.25
39 Colorado 2.300
39 Florida 2.3
39 Maine 2.3
39 North Carolina 2.3
43 California 2.450
43 Nevada 2.45
43 New York 2.45
43 Washington 2.45
47 Connecticut 2.5
48 Texas 2.6
49 Virginia 2.75
50 Maryland 3
51 Minnesota 3.15
Table A-10. State Rankings of Electric
Utility Costs
Rank State Elec. Costs
1 West Virginia 0.54
1 Idaho 0.54
3 Wyoming 0.56
4 Washington 0.66
5 Kentucky 0.67
6 Indiana 0.69
6 North Dakota 0.69
8 Arkansas 0.71
8 Nebraska 0.71
10 Oregon 0.73
11 Utah 0.74
11 South Dakota 0.74
13 Tennessee 0.76
13 Iowa 0.76
13 South Carolina 0.76
16 Virginia 0.770
17 New Mexico 0.8
17 Oklahoma 0.8
17 Kansas 0.8
17 Montana 0.8
21 North Carolina 0.81
21 Missouri 0.81
45
23 Alabama 0.83
24 Ohio 0.86
24 Colorado 0.86
24 Minnesota 0.86
24 Mississippi 0.86
28 Georgia 0.88
29 Louisiana 0.89
30 Arizona 0.93
30 Wisconsin 0.93
32 Illinois 0.94
32 Michigan 0.94
34 Pennsylvania 0.99
35 Nevada 1.06
36 Florida 1.08
37 Texas 1.11
38 Delaware 1.21
39 Vermont 1.270
40 Dist. Of Columbia 1.29
41 Maryland 1.3
42 Alaska 1.35
43 Maine 1.360
44 Rhode Island 1.4
45 New Hampshire 1.43
46 California 1.43
47 New Jersey 1.57
48 Massachusetts 1.6
49 New York 1.7
50 Connecticut 1.71
51 Hawaii 2.2
Table A-11. State Rankings of Workers’
Compensation Benefits Per $100 of
Covered Wages
Rank State Work Comp
1 Dist. Of Columbia 0.31
2 Texas 0.55
3 Arizona 0.58
3 Massachusetts 0.58
5 Indiana 0.61
6 Arkansas 0.62
6 Virginia 0.62
8 New York 0.68
8 Utah 0.68
10 Maryland 0.76
11 Rhode Island 0.8
12 Connecticut 0.83
12 Georgia 0.83
12 South Dakota 0.83
46
15 New Jersey 0.85
16 Nevada 0.860
17 Michigan 0.87
18 New Hampshire 0.88
18 North Dakota 0.88
20 Minnesota 0.89
21 Kansas 0.9
22 Delaware 0.92
23 Oregon 0.94
24 Illinois 0.98
24 Tennessee 0.98
26 Iowa 1.01
26 New Mexico 1.01
28 Alabama 1.02
29 Colorado 1.03
30 Mississippi 1.04
31 Nebraska 1.06
31 North Carolina 1.06
33 Florida 1.09
34 Louisiana 1.11
35 Missouri 1.18
36 Kentucky 1.22
37 Vermont 1.23
38 Hawaii 1.24
39 Pennsylvania 1.250
40 Ohio 1.26
41 Wisconsin 1.27
42 Idaho 1.33
43 Oklahoma 1.340
44 South Carolina 1.37
45 Maine 1.44
45 Wyoming 1.44
47 California 1.59
48 Alaska 1.7
49 Washington 1.72
50 Montana 2.11
51 West Virginia 3.39
Table A-12. State Rankings of Crime
Rate
Rank State Crime Rate
1 New Hampshire 1.93
2 South Dakota 1.95
3 North Dakota 2.08
4 Vermont 2.4
5 Maine 2.53
6 New York 2.55
7 New Jersey 2.69
47
8 Kentucky 2.8
9 Massachusetts 2.82
10 Connecticut 2.83
11 Pennsylvania 2.84
12 West Virginia 2.9
12 Wisconsin 2.9
14 Virginia 2.92
15 Idaho 2.95
16 Rhode Island 2.970
17 Iowa 3.13
18 Minnesota 3.38
19 Wyoming 3.39
20 Montana 3.42
21 Mississippi 3.54
22 Illinois 3.63
23 Michigan 3.64
24 Nebraska 3.71
25 Delaware 3.74
26 Indiana 3.78
27 California 3.85
28 Ohio 4.01
29 Utah 4.1
30 Kansas 4.17
31 Alaska 4.24
32 Maryland 4.25
33 Louisiana 4.28
34 Alabama 4.32
35 Colorado 4.44
36 Missouri 4.45
37 North Carolina 4.54
38 Oklahoma 4.55
39 Arkansas 4.590
40 Georgia 4.62
41 Oregon 4.69
42 Florida 4.72
43 Nevada 4.850
43 New Mexico 4.85
45 Texas 4.86
46 Tennessee 5.03
47 Hawaii 5.05
48 South Carolina 5.1
49 Washington 5.24
50 Arizona 5.35
51 Dist. Of Columbia 6.21
Table A-13. State Rankings of the
Number of Government Employees
Rank State Govt Employ
48
1 Nevada 4.14
2 Pennsylvania 4.57
3 Arizona 4.62
4 Florida 4.79
5 Rhode Island 4.8
6 Michigan 4.82
7 Oregon 4.91
8 Illinois 4.95
9 California 4.99
10 Utah 5.05
11 Massachusetts 5.16
12 Maryland 5.18
12 Wisconsin 5.18
14 Washington 5.21
15 Minnesota 5.27
15 Indiana 5.270
17 New Hampshire 5.31
18 West Virginia 5.36
18 Tennessee 5.36
20 Connecticut 5.37
20 Ohio 5.37
22 Georgia 5.4
23 Hawaii 5.41
24 Idaho 5.42
25 Missouri 5.48
26 Texas 5.59
27 Virginia 5.63
28 Montana 5.74
29 Arkansas 5.76
29 South Carolina 5.76
31 North Carolina 5.77
32 South Dakota 5.78
33 Kentucky 5.8
33 Delaware 5.8
35 New Jersey 5.87
35 Maine 5.87
37 Alabama 5.93
38 Oklahoma 5.99
39 New York 6.170
40 Iowa 6.23
41 Louisiana 6.43
41 Vermont 6.43
43 North Dakota 6.480
44 Mississippi 6.49
45 New Mexico 6.55
46 Nebraska 6.64
47 Kansas 6.69
48 Colorado 7.28
49 Alaska 7.85
49
50 Dist. Of Columbia 8.02
51 Wyoming 8.89
Table A-14. State Rankings of State
Gas Taxes
Gas
Rank State Tax
1 Alaska 0.8
2 Wyoming 1.14
3 New Jersey 0.145
4 South Carolina 0.168
5 Oklahoma 0.17
6 Missouri 0.176
7 New Mexico 0.18
8 Kentucky 0.185
9 Mississippi 0.188
10 Arizona 0.19
11 New Hampshire 0.196
11 Virginia 0.196
13 Dist. Of Columbia 0.2
13 Louisiana 0.2
13 Minnesota 0.2
13 Texas 0.200
13 Vermont 0.2
18 Alabama 0.202
19 Tennessee 0.214
20 Iowa 0.217
21 Arkansas 0.218
22 Colorado 0.22
23 Delaware 0.23
23 North Dakota 0.23
25 Maryland 0.235
25 Massachusetts 0.235
27 South Dakota 0.24
28 Utah 0.245
29 Idaho 0.25
29 Kansas 0.25
29 Oregon 0.25
32 Georgia 0.265
33 Montana 0.278
34 Nebraska 0.279
35 Ohio 0.28
36 Maine 0.291
37 North Carolina 0.3
38 Rhode Island 0.31
39 West Virginia 0.315
40 Indiana 0.316
41 Pennsylvania 0.323
50
42 Nevada 0.325
43 Florida 0.326
43 Hawaii 0.326
45 Wisconsin 0.329
46 Washington 0.36
47 Michigan 0.362
48 Illinois 0.406
49 New York 0.409
50 Connecticut 0.439
51 California 0.444
Table A-15. State Rankings of State
and Local Government Five-Year
Spending Trends, 1999-00 to 2004-05
Rank State Spend Trend
1 Alaska 0.34
2 Oregon 0.47
3 Minnesota 0.62
4 Utah 0.65
5 North Dakota 0.7
6 Wisconsin 0.73
7 Connecticut 0.74
7 Georgia 0.74
7 Hawaii 0.74
10 Kentucky 0.75
11 North Carolina 0.77
11 West Virginia 0.77
13 Michigan 0.78
14 Colorado 0.82
15 Arizona 0.83
15 Montana 0.830
17 Iowa 0.84
18 Idaho 0.9
18 Texas 0.9
18 Washington 0.9
21 Virginia 0.93
22 Mississippi 0.95
23 Illinois 0.96
23 Maryland 0.96
25 Tennessee 0.97
26 Alabama 0.98
26 Kansas 0.98
26 Missouri 0.98
26 Nebraska 0.98
26 Nevada 0.98
26 South Dakota 0.98
32 Louisiana 1.01
32 Maine 1.01
51
34 New York 1.05
35 Indiana 1.06
36 Massachusetts 1.09
36 New Mexico 1.09
36 Pennsylvania 1.09
39 New Hampshire 1.100
40 Ohio 1.14
41 South Carolina 1.15
42 Oklahoma 1.19
43 Vermont 1.200
44 Arkansas 1.24
45 California 1.25
46 Delaware 1.28
46 Dist. Of Columbia 1.28
48 New Jersey 1.29
49 Florida 1.35
50 Rhode Island 1.47
51 Wyoming 1.61
Table A-16. State Rankings of Per
Capita State and Local Government
Expenditures, 2004-05
Rank State Spend vs Avg
1 Arkansas 0.78
1 Idaho 0.78
1 Oklahoma 0.78
4 Missouri 0.8
4 South Dakota 0.8
6 Georgia 0.81
6 Kentucky 0.81
8 Arizona 0.82
9 New Hampshire 0.83
9 Texas 0.83
11 Indiana 0.84
12 Virginia 0.85
12 West Virginia 0.85
14 Kansas 0.86
14 Mississippi 0.86
14 Montana 0.860
17 Utah 0.87
18 North Carolina 0.88
19 Louisiana 0.9
19 Nevada 0.9
19 Tennessee 0.9
22 Alabama 0.91
23 Florida 0.92
23 Iowa 0.92
23 Maryland 0.92
52
26 Colorado 0.94
26 North Dakota 0.94
28 Michigan 0.95
29 Illinois 0.96
30 Maine 0.97
30 South Carolina 0.97
32 Wisconsin 0.98
33 Ohio 1
33 Oregon 1
35 Nebraska 1.01
35 New Mexico 1.01
35 Pennsylvania 1.01
38 Hawaii 1.03
39 Vermont 1.040
40 Minnesota 1.06
41 Connecticut 1.07
42 Rhode Island 1.09
43 New Jersey 1.110
44 Delaware 1.12
44 Washington 1.12
46 Massachusetts 1.15
47 California 1.19
48 Wyoming 1.39
49 New York 1.48
50 Alaska 1.89
51 Dist. Of Columbia 1.95
Table A-17. State Rankings of
Highway Cost Effectiveness, 2005
Rank State Hgwy Cost Eff
1 North Dakota 0.05
2 South Carolina 0.1
3 Kansas 0.15
4 New Mexico 0.2
5 Montana 0.25
6 Georgia 0.3
7 Wyoming 0.35
8 Oregon 0.4
9 Nevada 0.45
10 Idaho 0.5
11 South Dakota 0.55
12 Kentucky 0.6
13 Minnesota 0.65
14 Indiana 0.7
15 Texas 0.75
16 Ohio 0.800
17 Missouri 0.85
18 Virginia 0.9
53
19 Nebraska 0.95
20 Tennessee 1
21 Utah 1.05
22 Wisconsin 1.1
23 Maine 1.15
24 Oklahoma 1.2
25 Mississippi 1.25
26 West Virginia 1.3
27 Arizona 1.35
28 Arkansas 1.4
29 Colorado 1.45
30 Louisiana 1.5
31 North Carolina 1.55
32 Washington 1.6
33 Illinois 1.65
34 New Hampshire 1.7
35 Iowa 1.75
36 Pennsylvania 1.8
37 Vermont 1.85
38 Maryland 1.9
39 Connecticut 1.950
40 Delaware 2
41 Florida 2.05
42 Michigan 2.1
43 Alabama 2.150
44 California 2.2
45 Massachusetts 2.25
46 Hawaii 2.3
47 Rhode Island 2.35
48 New York 2.4
49 Alaska 2.45
50 New Jersey 2.5
54
Appendix 2. U.S. Economic Freedom Index
Table B-1. U.S. Economic
Freedom Index 2004
State Rank
Alabama 25
Alaska 33
Arizona 11
Arkansas 23
California 49
Colorado 2
Connecticut 48
Delaware 8
Florida 22
Georgia 19
Hawaii 35
Idaho 4
Illinois 46
Indiana 14
Iowa 16
Kansas 1
Kentucky 39
Louisiana 40
Maine 30
Maryland 27
Massachusetts 41
Michigan 34
Minnesota 44
Mississippi 28
Missouri 10
Montana 21
Nebraska 20
Nevada 12
New Hampshire 7
New Jersey 42
New Mexico 37
New York 50
North Carolina 24
North Dakota 18
Ohio 43
Oklahoma 6
Oregon 29
Pennsylvania 45
Rhode Island 47
South Carolina 13
South Dakota 15
Tennessee 26
55
Texas 17
Utah 5
Vermont 36
Virginia 3
Washington 31
West Virginia 32
Wisconsin 38
Wyoming 9
Table B-2. Sector Scores and Rankings, 2004
State Score Rank Score Rank Score Rank Score Rank Score Rank
Alabama 17 1 28 30 18 6 34 46 28 31
Alaska 21 9 26 17 33 42 35 47 36 47
Arizona 21 5 28 28 28 26 17 6 20 13
Arkansas 22 10 27 19 29 29 27 26 28 32
California 35 48 36 50 16 3 25 21 40 48
Colorado 22 12 20 2 24 19 20 10 16 7
Connecticut 37 50 36 49 35 47 16 3 36 46
Delaware 26 34 20 3 35 46 17 7 22 17
Florida 23 20 31 41 22 12 22 15 21 15
Georgia 21 6 30 39 14 2 18 8 18 9
Hawaii 25 31 29 35 32 36 28 30 30 37
Idaho 23 22 25 14 23 16 25 23 9 1
Illinois 29 39 34 48 16 4 20 11 31 39
Indiana 22 11 30 36 32 37 22 13 20 14
Iowa 25 29 26 18 28 25 32 41 20 11
Kansas 22 13 21 4 22 13 25 22 12 2
Kentucky 24 27 32 44 31 33 27 25 32 44
Louisiana 24 23 31 40 26 20 29 35 32 45
Maine 30 41 28 27 33 39 28 31 25 22
Maryland 28 37 28 26 27 22 17 4 25 25
Massachusetts 31 43 28 25 29 30 17 5 32 43
Michigan 29 38 25 10 12 1 28 29 25 21
Minnesota 34 46 28 24 20 10 27 27 29 33
Mississippi 22 15 25 13 22 15 33 43 29 34
Missouri 18 2 27 21 30 32 23 20 23 19
Montana 24 26 25 12 31 34 34 45 25 24
Nebraska 24 28 24 6 31 35 33 44 25 23
Nevada 23 18 25 11 19 7 11 2 20 10
New
Hampshire 24 24 27 20 40 50 7 1 20 12
New Jersey 35 49 29 33 28 23 22 16 27 29
New Mexico 25 30 34 47 33 41 36 48 27 28
New York 34 47 31 42 20 8 37 50 46 50
North Carolina 23 21 27 22 24 18 23 18 26 26
North Dakota 23 17 19 1 29 28 37 49 29 35
Ohio 26 33 32 45 20 9 25 24 32 42
56
Oklahoma 23 19 24 8 30 31 28 34 14 5
Oregon 26 32 33 46 28 24 30 36 22 16
Pennsylvania 30 42 32 43 21 11 27 28 30 36
RhodeIsland 32 44 29 31 34 45 22 17 41 49
South Carolina 19 4 23 5 34 43 32 42 27 30
South Dakota 21 7 28 29 32 38 21 12 25 20
Tennessee 19 3 30 37 26 21 22 14 31 38
Texas 22 14 30 38 22 14 23 19 18 8
Utah 23 16 25 9 35 48 30 38 15 6
Vermont 30 40 24 7 34 44 30 37 32 41
Virginia 21 8 25 15 28 27 19 9 14 4
Washington 28 36 26 16 23 17 31 40 26 27
West Virginia 24 25 29 34 33 40 31 39 31 40
Wisconsin 32 45 28 23 16 5 28 33 23 18
Wyoming 27 35 29 32 39 49 28 32 14 3
Table B-3. The Effect of Annual Income Per Capita of Becoming the
Freest State and the Oppression Tax
Rank State Annual Income Hike ($) Oppression Tax (%)
1 Kansas — —
2 Colorado 245 0.81
3 Virginia 75 0.25
4 Idaho 1185 5.35
5 Utah 556 2.52
6 Oklahoma 1062 4.69
7 New Hampshire 35 0.11
8 Delaware 1150 3.92
9 Wyoming 706 2.68
10 Missouri 1433 5.6
11 Arizona 633 2.72
12 Nevada 2001 7.34
13 South Carolina 1292 5.75
14 Indiana 1482 5.9
15 South Dakota 896 3.73
16 Iowa 1285.000 5.16
17 Texas 261 1
18 North Dakota 1432 6.14
19 Georgia 942 3.63
20 Nebraska 920 3.53
21 Montana 1172 5.45
22 Florida 1226 4.71
23 Arkansas 702 3.36
24 North Carolina 376 1.5
25 Alabama 798 3.58
26 Tennessee 276 1.13
27 Maryland 1823 5.71
28 Mississippi 787 3.98
29 Oregon 1080 4.22
57
30 Maine 1833 7.61
31 Washington 62 0.22
32 West Virginia 697 3.36
33 Alaska 2025 7.15
34 Michigan 1899 7.04
35 Hawaii 2963 11.36
36 Vermont 1538 6.02
37 New Mexico 1095 5.18
38 Wisconsin 1601 6.06
39 Kentucky 618.000 2.7
40 Louisiana 750 3.41
41 Massachusetts 1637 4.62
42 New Jersey 2392 6.87
43 Ohio 1457.000 5.58
44 Minnesota 915 3.06
45 Pennsylvania 988 3.53
46 Illinois 2188 7.32
47 Rhode Island 3607 13.17
48 Connecticut 336 0.88
49 California 1180 3.95
50 New York 2441 7.45
58
Appendix 3. Tax Foundation Study
Table C-1. Federal Income Tax Compliance Costs by State Per Capita and Per $1000 of
Personal Income and Corresponding Ranks
Rank
Per $1000 Per
Total Percenta Per
of Net Percentage Per $1000 of
($Thousand ge of Tax Capit
National of Tax Capit Net
s) Liability a
Product Liablity a National
Product
All States (a) 265076056 0.222 897 24.29 — — —
Alabama 3219941 0.267 711 23.28 24 47 38
Alaska 553629 20.5 837 21.98 39 35 43
Arizona 4507259 24.1 768 25.19 31 44 25
Arkansas 2197035 32.5 791 28.11 7 40 15
California 27475735 16.2 762 19.26 48 45 50
Colorado 5388835 0.25 1167 29.48 27 3 10
Connecticut 3549749 12.6 1013 19.73 50 12 49
Delaware 988048 28.1 1181 30.68 18 2 5
Florida 18755867 23.9 1071 30.65 33 9 6
eorgia 7319114 24 820 24.04 32 36 33
Hawaii 1106040 0.242 866 24.11 30 31 32
Idaho 1253011 32.6 891 29.85 6 25 8
Illinois 11889942 20.1 936 23.38 41 19 36
Indiana 5099098 26.1 816 23.99 26 37 34
Iowa 2674188 32.000 899 26.05 8.000 23 18
Kansas 2411895 0.271 877 25.17 23 28 26
Kentucky 3208358 30.2 771 24.86 12 43 28
Louisiana 3522208 31.9 777 25.28 9 42 22
Maine 1259019 29.7 955 28.35 15 17 14
Maryland 5290059 19.5 945 21.82 43 18 45
Massachusetts 6413657 0.157 984 21.07 49 14 48
Michigan 8580129 24.6 841 23.33 28 34 37
Minnesota 4662462 21.2 901 22.18 38 22 41
Mississippi 1918420 31.8 658 24.14 10 50 31
Missouri 5051342 27.9 876 25.26 20 29 23
Montana 1077950 0.387 1155 38.4 1 4 1
Nebraska 1731409 31.1 993 27.06 11 13 16
Nevada 2564021 20.2 1090 30.82 40 7 4
New
Hampshire 1212655 18.5 922 22.56 47 21 40
New Jersey 9596512 18.6 1097 23.06 46 6 39
New Mexico 1418602 0.302 746 25.73 13 46 20
New York 20945020 19.7 1088 25.21 42 8 24
North Carolina 7079188 27.2 813 25.3 22 38 21
59
North Dakota 619054 33.3 974 28.91 5 16 12
Ohio 10131002 28 883 24.97 19 27 27
Oklahoma 3262950 0.356 927 30.33 3 20 7
Oregon 3216470 26.4 894 26.17 25 24 17
Pennsylvania 10483154 22.200 844 21.94 36.000 32 44
Rhode Island 1222267 27.5 1125 29.8 21 5 9
South Carolina 3295212 29.6 777 25.74 16 41 19
South Dakota 753053 0.299 976 28.86 14 15 13
Tennessee 4206418 21.700 705 21.57 37.000 48 47
Texas 18151157 22.3 797 23.81 35 39 35
Utah 2529996 38.5 1046 36.79 2 10 2
Vermont 649762 29 1030 28.94 17 11 11
Virginia 6354535 0.187 841 21.65 45 33 46
Washington 5432102 18.8 875 22 44 30 42
West Virginia 1254098 33.3 689 24.3 4 49 30
Wisconsin 4924727 24.4 887 24.59 29 26 29
Wyoming 629920 22.8 1242 33.27 34 1 3
Dist of
Columbia 3017969 0.761 5476 100.85 — — —
Table C-2. Federal Income Tax Compliance Costs by Type of Filer
by State Calendar Year 2005 $ Thousands
Total Individual Business Non-Profit
All States (a) 265076056 110668347 147648311 6759399
Alabama 3219941 1432185 1712680 75076
Alaska 553629 247410 277609 28610
Arizona 4507259 1640739 2777771 88749
Arkansas 2197035 868421 1278145 50470
California 27475735 11826059 14931660 718016
Colorado 5388835 1820842 3440136 127857
Connecticut 3549749 1410219 2021643 117887
Delaware 988048 377344 586206 24498
Florida 18755867 6472362 11990886 292618
Georgia 7319114 2811077 4361151 146886
Hawaii 1106040 500796 572120 33124
Idaho 1253011 426756 798792 27463
Illinois 11889942 5208953 6376240 304749
Indiana 5099098 2240684 2700037 158377
Iowa 2674188 1172893 1406308 94987
Kansas 2411895 1018715 1322168 71012
Kentucky 3208358 1374291 1757070 76997
Louisiana 3522208 1230745 2215189 76275
Maine 1259019 557666 654479 46874
Maryland 5290059 2265594 2879702 144763
Massachusetts 6413657 2948390 3237789 227478
60
Michigan 8580129 3464278 4907878 207973
Minnesota 4662462 1738501 2747499 176462
Mississippi 1918420 854252 1017166 47002
Missouri 5051342 2352563 2556643 142136
Montana 1077950 338595 703498 35858
Nebraska 1731409 677272 1001109 53028
Nevada 2564021 819620 1711443 32958
New Hampshire 1212655 509403 659293 43959
New Jersey 9596512 3424417 5953136 218959
New Mexico 1418602 629639 746198 42765
New York 20945020 7829188 12539246 576586
North Carolina 7079188 2962209 3916769 200211
North Dakota 619054 236688 358684 23682
Ohio 10131002 4863542 4955894 311566
Oklahoma 3262950 1520866 1668853 73231
Oregon 3216470 1275268 1838640 102562
Pennsylvania 10483154 5014860 5094842 373452
Rhode Island 1222267 565547 597316 59405
South Carolina 3295212 1371097 1858168 65947
South Dakota 753053 294134 432989 25929
Tennessee 4206418 1989919 2112177 104322
Texas 18151157 7514136 10250072 386949
Utah 2529996 758595 1732893 38508
Vermont 649762 256507 358651 34604
Virginia 6354535 2630501 3541535 182499
Washington 5432102 2264688 3010551 156863
West Virginia 1254098 652160 558040 43898
Wisconsin 4924727 2272859 2492299 159569
Wyoming 629920 194035 416399 19486
District of Columbia 3017969 2622579 314167 81222
61
Appendix 4. The Best States For Business (Forbes Ranking)
Table D-1. 2006 Forbes Ranking - The Best States For Business
Business Regulatory Economic Growth Quality
Rank Name Labor
Costs Environment Climate Prospects Of Life
1 Virginia 10 4 1 8 10 5
2 Texas 22 25 6 7 2 23
3 North Carolina 4 26 3 30 4 26
4 Utah 19 9 18 17 11 17
5 Colorado 31 2 8 35 1 19
6 Idaho 13 16 34 2 22 20
7 Nebraska 9 29 14 27 30 9
8 Delaware 6 6 27 37 25 25
9 Florida 35 13 16 4 3 42
10 Georgia 18 18 4 38 19 29
11 Maryland 42 3 15 9 17 31
12 Washington 37 5 5 26 5 41
13 North Dakota 3 41 17 19 34 13
14 Minnesota 30 14 20 25 31 3
15 Arizona 24 7 36 1 13 43
16 New Jersey 46 15 23 18 6 11
17 South Dakota 2 32 35 11 39 18
18 New Hampshire 44 1 44 16 18 2
19 Oklahoma 16 40 13 13 26 32
20 Tennessee 15 37 12 20 24 34
21 Kansas 28 21 10 48 20 15
22 Missouri 21 22 9 47 35 16
23 Wyoming 1 39 45 3 29 27
24 Arkansas 11 44 25 13 12 40
25 Iowa 8 47 30 31 41 1
26 Nevada 26 24 31 6 14 49
27 South Carolina 17 28 7 46 21 46
28 Connecticut 43 8 43 28 23 4
29 New Mexico 7 38 40 10 8 50
30 Vermont 40 10 46 12 42 8
31 Oregon 34 12 33 40 7 35
32 Indiana 12 46 22 42 43 10
33 Kentucky 5 42 32 43 32 22
34 Ohio 32 33 11 45 47 14
35 New York 47 35 21 24 14 24
36 California 48 17 41 22 9 28
37 Massachusetts 49 19 37 33 27 7
38 Montana 14 20 48 23 45 38
39 Wisconsin 27 30 42 39 38 6
62
40 Alabama 29 43 19 36 16 39
41 Pennsylvania 38 34 29 32 44 12
42 Hawaii 50 11 38 5 37 44
43 Rhode Island 33 23 50 15 36 33
44 Illinois 39 31 28 43 28 30
45 Michigan 41 45 2 49 49 37
46 Maine 45 26 49 21 48 21
47 Alaska 25 36 39 34 32 48
48 Mississippi 20 49 24 50 40 45
49 West Virginia 23 48 47 29 50 36
50 Louisiana 36 50 26 41 46 47
Table D-2. 2007 Forbes Ranking - The Best States For Business
Quali Gross
200 Busine Lab Regulator Econo Growth
Over ty of State
6 ss or y mic Prospe Populati
all State Life Produ
ran Costs Ran Environm Climate cts on
rank Rank ct
k Rank k ent Rank Rank Rank
6 ($bil)
7,644,23
1 1 Virginia 17 5 1 11 8 6 0 335
2,514,20
2 4 Utah 12 11 17 9 16 12 0 81
North 8,783,55
3 3 Carolina 6 22 2 27 5 30 0 336
23,261,0
4 2 Texas 21 26 7 10 2 28 60 888
6,369,30
5 12 Washington 33 4 5 16 4 32 0 256
1,462,79
6 6 Idaho 11 10 30 3 23 27 0 45
18,138,1
7 9 Florida 31 15 12 1 3 35 40 616
4,736,63
8 5 Colorado 35 2 15 33 1 23 0 206
North
9 13 Dakota 5 37 16 11 42 14 636,480 22
5,171,89
10 14 Minnesota 32 13 19 23 26 1 0 224
11 8 Delaware 7 14 32 39 14 15 854,950 52
5,642,14
12 11 Maryland 41 3 24 8 15 21 0 228
6,011,44
13 20 Tennessee 3 39 13 15 21 37 0 215
New 1,320,83
14 18 Hampshire 39 1 42 14 13 5 0 54
9,228,23
15 10 Georgia 23 25 4 34 17 29 0 345
5,831,01
16 22 Missouri 14 20 8 44 37 17 0 199
1,767,36
17 7 Nebraska 15 36 11 30 38 13 0 66
63
6,118,13
18 15 Arizona 30 6 37 6 11 40 0 212
8,770,91
19 16 New Jersey 46 9 33 25 7 3 0 425
2,750,08
20 21 Kansas 29 18 8 49 22 18 0 99
2,805,84
21 24 Arkansas 9 40 22 17 9 45 0 80
2,483,12
22 26 Nevada 19 24 31 6 10 48 0 106
South 4,296,16
23 27 Carolina 20 28 6 36 17 43 0 133
2,978,92
24 25 Iowa 8 43 26 22 44 11 0 111
South
25 17 Dakota 1 31 45 17 35 24 778,410 29
New 1,952,65
26 29 Mexico 10 34 43 5 6 50 0 62
6,298,14
27 32 Indiana 4 46 18 40 39 20 0 226
3,684,49
28 31 Oregon 26 7 34 32 19 38 0 134
29 23 Wyoming 2 35 48 4 36 39 512,830 23
3,564,57
30 19 Oklahoma 18 47 14 20 30 36 0 104
3,528,26
31 28 Connecticut 44 8 40 37 24 4 0 189
32 30 Vermont 45 12 35 26 40 10 624,680 22
19,261,5
33 35 New York 48 33 20 21 26 19 20 947
36,460,7
34 36 California 50 17 39 17 12 26 40 1,606
4,599,26
35 40 Alabama 27 45 23 23 20 41 0 140
Massachus 6,403,12
36 37 etts 49 19 29 47 29 2 0 322
1,279,10
36 42 Hawaii 47 16 38 2 40 33 0 49
11,489,7
38 34 Ohio 36 42 8 45 49 9 10 416
Pennsylvan 12,466,5
39 41 ia 38 31 27 35 46 7 70 458
12,819,0
40 44 Illinois 37 30 20 46 31 22 60 523
4,201,73
41 33 Kentucky 16 41 28 48 25 34 0 133
42 38 Montana 24 21 47 13 48 42 942,050 27
2,935,35
43 48 Mississippi 13 48 25 40 34 47 0 71
5,563,38
44 39 Wisconsin 34 38 44 38 33 8 0 209
Rhode 1,079,59
45 43 Island 42 23 49 28 28 25 0 40
46 45 Michigan 40 44 3 50 47 31 10,139,1 365
64
50
47 47 Alaska 28 29 36 42 32 44 669,140 32
1,327,75
48 46 Maine 43 27 46 30 42 16 0 42
4,467,12
49 50 Louisiana 22 50 41 43 45 49 0 126
West 1,820,74
50 49 Virginia 25 49 50 29 50 46 0 46
Table D-3. 2008 Forbes Ranking - The Best States For Business
Regula Quali
Busine Econo Growth Gross
Over tory ty of
2007 ss Labor mic Prospe State
all State Environ Life Population
rank Costs Rank Climate cts Produc
rank ment Rank
Rank Rank Rank t ($bil)
Rank 6
1 1 Virginia 20 7 1 6 26 6 7747500 326
2 2 Utah 11 10 19 9 12 8 2665300 87
3 5 Washington 28 2 6 7 2 25 6509100 261
North
4 3 Carolina 4 14 2 21 11 34 9162300 333
5 15 Georgia 23 6 5 10 6 31 9652200 343
6 8 Colorado 35 1 22 14 1 12 4901400 204
7 6 Idaho 10 15 29 5 27 15 1511400 46
8 7 Florida 34 5 18 1 5 33 18321700 625
9 4 Texas 25 24 13 11 4 27 24064400 894
10 17 Nebraska 13 28 12 25 23 9 1780600 66
11 10 Minnesota 31 7 20 35 21 4 5218800 218
12 11 Delaware 3 17 27 33 24 29 870400 52
13 9 North Dakota 8 30 13 22 36 26 641400 22
14 12 Maryland 40 9 26 16 15 14 5635500 226
15 26 New Mexico 9 21 30 18 10 50 1986000 65
16 28 Oregon 24 3 41 17 13 36 3774100 144
17 13 Tennessee 5 36 11 29 38 39 6189500 212
18 18 Arizona 32 22 38 3 3 41 6408200 213
19 22 Nevada 26 29 34 2 8 47 2598500 102
New
20 14 Hampshire 41 4 44 36 9 5 1317300 50
21 20 Kansas 30 19 9 43 31 24 2790200 97
22 24 Iowa 12 39 22 23 48 13 2995900 108
23 25 South Dakota 1 32 46 15 41 22 798900 29
24 42 Montana 21 18 47 8 19 40 964600 27
25 27 Indiana 6 43 15 40 39 23 6367800 220
26 30 Oklahoma 19 40 8 28 33 37 3629900 108
27 37 Hawaii 47 10 36 4 22 30 1285200 51
28 35 Alabama 22 42 17 31 7 42 4647600 141
29 23 South 27 33 3 41 20 43 4434800 131
65
Carolina
30 16 Missouri 15 41 6 44 45 21 5894400 199
31 29 Wyoming 2 38 48 12 27 38 526300 20
32 21 Arkansas 7 45 25 27 18 48 2844800 80
33 31 Connecticut 45 13 41 24 29 3 3504500 181
34 19 New Jersey 48 20 40 20 32 1 8699000 397
35 40 Illinois 36 27 28 37 25 18 12893500 521
Massachuset
36 36 ts 46 16 24 45 40 2 6457600 307
36 32 Vermont 43 12 33 31 44 10 621600 22
38 33 New York 49 31 21 19 37 17 19314800 917
39 38 Ohio 29 47 10 47 47 11 11470100 403
40 34 California 50 25 45 12 14 28 36736500 1557
41 39 Pennsylvania 38 34 31 34 42 7 12450500 443
42 43 Mississippi 16 48 16 49 35 46 2926500 72
43 44 Wisconsin 37 37 37 26 46 16 5612800 200
44 41 Kentucky 17 46 35 42 33 35 4261100 129
45 45 Rhode Island 42 35 49 30 16 20 1056700 39
46 48 Maine 44 26 32 39 43 19 1319800 41
47 46 Michigan 39 44 4 46 49 32 10057100 341
48 47 Alaska 33 23 39 47 30 44 686900 30
49 49 Louisiana 18 50 43 50 17 49 4308500 145
50 50 West Virginia 14 49 50 38 50 45 1813800 46
66
Appendix 5. The Impact of Regulatory Costs on Small Firms:
Crain (2005)
Table F. Annual Incidence of Federal Regulations by Firm Size in
2004 (Dollars)*
Cost per Employee for Firms with:
All <20 20-499 500+
Type of Regulation
Firms Employees Employees Employees
All Federal
5633 7647 5411 5282
Regulations
Economic 2567 2127 2372 2952
Workplace 922 920 1051 841
Environmental 1249 3296 1040 710
Tax Compliance 894 1304 948 780
67
Appendix 6. Panel Data Regression to Measure Direct Costs of
Regulatory Environment to Economic Output
The results of the panel data regression that pools both time series and cross-
sectional data from both 2006 and 2007 based on the model below are presented in this
section.
Multiple Panel Data Regression - GSP
Dependent variable: GSP
Independent variables:
Business Cost
Economic Climate
Growth Prospects
Labor
Quality of Life
Regulatory Environment
Standard T
Parameter Estimate P-Value
Error Statistic
CONSTANT 240566. 103213. 2.33076 0.0219
Business Cost 12726.0 2058.92 6.1809 0.0000
Economic Climate -3105.26 2157.7 -1.43915 0.1535
Growth Prospects -10803.1 2555.83 -4.22684 0.0001
Labor 10712.6 2652.1 4.03929 0.0001
68
Quality of Life -4113.06 2042.61 -2.01363 0.0469
Regulatory Environment -4424.16 2098.95 -2.1078 0.0377
Analysis of Variance
Sum of Mean
Source Df F-Ratio P-Value
Squares Square
Model 4.08312E12 6 6.8052E11 10.34 0.0000
Residual 6.12232E12 93 6.58314E10
Total (Corr.) 1.02054E13 99
R-squared = 40.0093 percent
R-squared (adjusted for d.f.) = 36.1389 percent
Standard Error of Est. = 256576.
Mean absolute error = 172497.
Durbin-Watson statistic = 2.29381 (P=0.9261)
Lag 1 residual autocorrelation = -0.161074
Since the P-value in the ANOVA table is less than 0.05, there is a statistically significant
relationship between the variables at the 95% confidence level.
The R-Squared statistic indicates that the model as fitted explains 40.0093% of the
variability in GSP. The adjusted R-squared statistic, which is more suitable for
69
comparing models with different numbers of independent variables, is 36.1389%. The
standard error of the estimate shows the standard deviation of the residuals to be
256576.0. This value can be used to construct prediction limits for new observations by
selecting the Reports option from the text menu. The mean absolute error (MAE) of
172497 is the average value of the residuals. The Durbin-Watson (DW) statistic tests
the residuals to determine if there is any significant correlation based on the order in
which they occur in your data file. Since the P-value is greater than 0.05, there is no
indication of serial autocorrelation in the residuals at the 95% confidence level.
70
Appendix 7. Results from IMPLAN Analysis
Output
Direct Impact: loss of $176,966,402,048
Indirect* Induced* Total*
Manufacturing $7,575,818,445 $36,220,089,352 $43,795,907,797
Wholesaling $1,447,455,872 $10,958,849,024 $12,406,304,896
Retailing $6,276,022,815 $22,992,639,200 $29,268,662,015
Real Estate $12,490,080,128 $50,651,317,344 $63,141,397,472
Professional Services $31,060,473,101 $44,380,293,176 $252,407,168,325
Administrative $1,524,238,592 $3,615,473,880 $5,139,712,472
Education $18,280,974 $2,496,545,024 $2,514,825,998
Health $1,169,334 $18,970,450,236 $18,971,619,570
Arts, entertainment,
recreation $5,346,622,918 $4,499,461,512 $9,846,084,430
Accommodations, food
services $515,818,909 $12,903,529,840 $13,419,348,749
Other $3,264,105,145 $11,114,991,769 $14,379,096,914
Farming $63,345,767 $4,074,800,142 $4,138,145,909
Federal $1,004,715,074 $13,497,007,692 $14,501,722,766
State and local $607,866,188 $8,456,593,440 $9,064,459,628
Total $71,196,013,262 $244,832,041,631 $492,994,456,941
Employment
Direct Impact: loss of 1,085,927 FTE jobs
Indirect* Induced* Total*
Manufacturing 61,973 274,302 336,275
Wholesaling 0 43 43
71
Retailing 1,508 15,871 17,379
Real Estate 1,395 6,198 7,594
Professional Services 79,441 423,843 503,284
Administrative 15,195 63,842 79,037
Education 52,182 68,149 120,331
Health 92,902 46,374 139,275
Arts, entertainment,
recreation 92,070 115,698 207,768
Accommodations, food
services 5,118 25,296 1,116,342
Other 85,903 682,289 768,192
Farming 7,762 131,333 139,096
Federal 0 357,705 357,705
Total 495,450 2,210,942 3,792,319
72
Labor Income
Direct Impact: loss of $81,815,281,664
Indirect* Induced* Total*
Manufacturing $2,651,533,633 $8,073,559,567 $10,725,093,200
Wholesaling $616,426,496 $4,667,033,600 $5,283,460,096
Retailing $2,435,808,207 $10,057,065,892 $12,492,874,099
Real Estate $3,060,682,621 $11,310,201,260 $14,370,883,881
Professional Services $14,073,823,686 $20,803,991,504 $116,693,096,854
Administrative $799,880,327 $1,933,492,780 $2,733,373,107
Education $10,203,844 $1,435,994,912 $1,446,198,756
Health $461,700 $10,908,965,204 $10,909,426,904
Arts, entertainment,
recreation $1,839,529,521 $1,526,487,056 $3,366,016,577
Accommodations, food
services $196,730,318 $4,907,992,312 $5,104,722,630
Other $1,019,510,848 $4,504,314,868 $5,523,825,716
Farming $15,553,770 $2,977,130,327 $2,992,684,097
Federal $361,336,425 $11,271,629,036 $11,632,965,461
State and local $142,494,096 $7,054,005,584 $7,196,499,680
Total $27,223,975,492 $101,431,863,902 $210,471,121,058
Indirect Business Taxes
Direct Impact: loss of $1,759,132,416
Indirect* Induced* Total*
Manufacturing $77,837,229 $304,508,739 $382,345,968
Wholesaling $238,227,248 $1,803,644,928 $2,041,872,176
Retailing $246,616,518 $2,728,862,839 $2,975,479,357
Real Estate $1,155,526,179 $3,744,067,922 $4,899,594,101
73
Indirect* Induced* Total*
Professional Services $727,929,931 $964,262,317 $3,451,324,664
Administrative $29,143,827 $58,982,706 $88,126,533
Education $84,885 $20,294,468 $20,379,353
Health $8,825 $137,704,454 $137,713,279
Arts, entertainment,
recreation $90,205,980 $210,654,874 $300,860,854
Accommodations, food
services $39,394,705 $962,681,460 $1,002,076,165
Other $226,633,007 $460,610,938 $687,243,945
Farming $960,209 $29,860,064 $30,820,273
Federal $246,520 $497,009 $743,529
State and local $2,526,304 $3,305,828 $5,832,132
Total $2,835,341,367 $11,429,938,546 $16,024,412,329
74
Appendix 8. Direct Costs to Households and Residents of
California State
DIRECT IMPACT PER HOUSEHOLD 2006 pop. 2007 pop.
Adverse Regulatory Cost--Direct Impact $176,966,400,000 $176,966,400,000
Number of Households in California 12,664,075 12,822,784
Cost per Household $13,973.89 $13,800.93
Population 37,332,976 37,771,431
Cost per Resident of State $4,740.22 $4,685.19
75
Appendix 9. State Revenues from Regulatory Taxes and
Licenses
2006-7 Revenues
ALL HEADINGS
Major Taxes and Licenses $109,359,764,000
Regulatory Taxes and Licenses $5,484,317,000
Revenue From Local Agencies $1,097,764,000
Services to the Public $455,158,000
Use of Property and Money $1,555,597,000
Miscellaneous $2,180,102,000
Total $120,132,702,000
2006-7 Revenues
REGULATORY TAXES AND LICENSES
Economic General Fish & Game taxes $1,061,000
Environment Energy resource surcharge $600,518,000
Economic Quarterly Public Utility Commission Fees $86,646,000
Workplace Hwy Carrier Uniform business license tax $255,000
Economic Off-highway vehicle fees $11,541,000
Economic Liquor license fees $48,881,000
Environment Genetic disease testing fee $97,982,000
Economic New motor vehicle dealer fees $1,841,000
Economic General Fish & Game license tag permits $89,272,000
Workplace Elevator and Boiler inspection fees $16,626,000
Workplace Industrial homework fees $1,000
Economic Employment agency license fees $5,674,000
Economic Employment agency filing fees $79,000
Economic Teacher credential fees $14,385,000
Economic Teacher examination fees $4,257,000
Economic Insurance company license fees & penalties $38,087,000
Economic Insurance company examination fees $19,042,000
Economic Real estate examination fees $8,570,000
Economic Real estate license fees $22,575,000
Economic Subdivision filing fees $9,358,000
Economic Building construction filing fees $4,278,000
Economic Domestic corporation fees $12,697,000
Economic Foreign corporation fees $1,086,000
Economic Notary public license fees $1,869,000
Environment Beverage container redemption fees $934,042,000
Environment Explosive permit fees $1,000
Environment Environmental and hazardous waste fees $66,449,000
Economic Private rail car tax $6,703,000
Economic Insurance department fees, Prop 103 $29,563,000
Economic Insurance department fees, general $20,668,000
Economic Insurance fraud assessment, workers comp $40,479,000
76
Economic Insurance fraud assessment, auto $43,691,000
Economic Insurance fraud assessment, general $5,140,000
Economic Other regulatory taxes $2,571,214,000
Economic Other regulatory licenses and permits $485,210,000
Subtotal $5,299,741,000
Other $184,576,000
Total $5,484,317,000
2006-7 Revenues
MAJOR TAXES AND LICENSES
Economic Alcoholic beverage taxes and fees $333,789,000
Economic Horse racing license fees $37,527,000
Economic Insurance gross premiums tax $2,178,336,000
Total
REVENUE FROM LOCAL AGENCIES
Workplace Architecture public building fees $48,507,000
77
Appendix 10. Direct Costs to Small Business in California
Employer
Total Small Small Non-Farm Employer
Business Business Small Business
Regulation Cost Per Firm 3,675,700 1,137,100 696,300
Direct Regulatory Cost $176,966,400,000 48,144.95 155,629.58 254,152.52
Labor Income Lost $81,815,281,664 22,258.42 71,950.82 117,500.05
Indirect Business Taxes
Lost $1,759,132,416 478.58 1,547.03 2,526.40
Number of Jobs Lost 1,085,927 0.30 0.95 1.56
Direct Regulatory Cost 176,966,400,000 48,144.95 155,629.58 254,152.52
78
Appendix 11. Total Costs (Direct and Second Order) to
California Households and Residents.
TOTAL IMPACT PER HOUSEHOLD 2006 pop. 2007 pop.
Adverse Regulatory Cost--Total Impact $492,994,456,941 $492,994,456,941
Number of Households in California 12,664,075 12,822,784
Cost per Household $38,928.58 $38,446.76
Population 37,332,976 37,771,431
Cost per Resident of State $13,205.34 $13,052.05
79
Appendix 12. Total Costs Relative to General Fund
2005/6 2006/7
to to
2007/8 2007/8
2005/6 2006-07 2007-08 Est. Growth Growth
GROWTH IN REVENUES
General Fund $84,471,000,000 $95,434,051,000 $100,009,982,000 8.81% 2.37%
Special Fund $24,078,000,000 $24,698,651,000 $25,400,711,000 2.71% 1.41%
Total $108,549,000,000 $120,132,702,000 $125,410,693,000 7.49% 2.17%
Output As Output as
2005/6 2006-07 Percent Percent
2005-06 2006-07
GROWTH IN REVENUES
General Fund $84,471,000,000 $95,434,051,000 583.63% 516.58%
Special Fund $24,078,000,000 $24,698,651,000 2047.49% 1996.04%
Total $108,549,000,000 $120,132,702,000 454.17% 410.37%
80
Appendix 13. Total Indirect Business Taxes Lost Relative to
General Fund Expenditures.
Indirect Indirect
Business
Business Taxes Taxes
GENERAL FUND for 2007-08
EXPENDITURES 2006-07 2007-08 Est. Growth for 2006-07 est
Office of Emergency Services $193,544,000 $268,218,000 38.58% 8279.5% 5974.4%
Science Center $15,186,000 $19,986,000 31.61% 105521.0% 80178.2%
Department of Fair Employment &
Housing $15,995,000 $18,889,000 18.09% 100183.9% 84834.6%
State & Consumer Services (incl. 2
above) $594,937,000 $597,795,000 0.48% 2693.5% 2680.6%
Department of Housing &
Community Development $18,733,000 $15,654,000 -16.44% 85541.1% 102366.2%
Department of Transportation $2,629,930,000 $1,438,555,000 -45.30% 609.3% 1113.9%
Department of Highway Patrol
(Operations) SPECIAL FUNDS $1,497,525,000 $1,749,800,000 16.85% 1070.1% 915.8%
California Conservation Corps $35,755,000 $24,729,000 -30.84% 44817.3% 64800.1%
Department of Conservation $4,504,000 $5,044,000 11.99% 355781.8% 317692.6%
Department of Forestry & Fire
Protection (incl. above) $710,164,000 $784,932,000 10.53% 2256.4% 2041.5%
Department of Fish & Game $114,900,000 $96,295,000 -16.19% 13946.4% 16641.0%
Department of Parks & Recreation $175,449,000 $151,213,000 -13.81% 9133.4% 10597.2%
Department of Water Resources $492,154,000 $198,845,000 -59.60% 3256.0% 8058.7%
Air Resources Board $2,280,000 $2,377,000 4.25% 702825.1% 674144.4%
Department of Toxic Substances
Control $25,006,000 $29,633,000 18.50% 64082.3% 54076.2%
Environmental Protection (incl 2
above) $83,820,000 $92,197,000 9.99% 19117.6% 17380.6%
Emergency Medical Services
Authority $29,065,000 $12,546,000 -56.83% 55133.0% 127725.3%
Department of Aging $60,978,000 $62,798,000 2.98% 26279.0% 25517.4%
Department of Health Care
Services (incl 2 above) $14,157,735,000 $14,417,739,000 1.84% 113.2% 111.1%
Department of Developmental
Services $2,532,094,000 $2,668,382,000 5.38% 632.9% 600.5%
Department of Mental Health $1,855,198,000 $1,971,118,000 6.25% 863.8% 813.0%
Department of Community Services
& Development $3,000,000 $3,000,000 0.00% 534147.1% 534147.1%
Department of Rehabilitation $55,511,000 $55,513,000 0.00% 28867.1% 28866.1%
Department of Child Support
Services $525,645,000 $351,700,000 -33.09% 3048.5% 4556.3%
81
Indirect Indirect
Business
Business Taxes Taxes
GENERAL FUND for 2007-08
EXPENDITURES 2006-07 2007-08 Est. Growth for 2006-07 est
Department of Social Services (incl.
5 above) $9,131,831,000 $9,119,279,000 -0.14% 175.5% 175.7%
Health & Human Services (incl. 9
above) $29,011,647,000 $29,758,488,000 2.57% 55.2% 53.8%
Department of Education $37,347,850,000 $38,331,008,000 2.63% 42.9% 41.8%
State Library $62,592,000 $48,991,000 -21.73% 25601.4% 32708.9%
Employment Development
Department $34,123,000 $31,047,000 -9.01% 46960.7% 51613.4%
Arts Council $1,211,000 $1,227,000 1.32% 1323238.0% 1305983.1%
Department of Food & Agriculture $101,958,000 $107,830,000 5.76% 15716.7% 14860.8%
Department of Veterans Affairs $13,485,000 $36,038,000 167.25% 118831.4% 44465.3%
82
Appendix 14. Total Costs (Direct and Second Order) to Small
Business in California
Employer
Total Small Small Non-Farm Employer
Business Business Small Business
Regulation Cost Per Firm 3,675,700 1,137,100 696,300
Total Regulatory Cost $492,994,000,000 134,122.48 433,553.78 708,019.53
Indirect Business Taxes
Lost $16,024,412,329 4,359.55 14,092.35 23,013.66
Labor Income Lost $210,471,121,058 57,260.15 185,094.65 302,270.75
Number of Jobs Lost 3,792,319 1.03 3.34 5.45
Direct Regulatory Cost 176,966,400,000 48,144.95 155,629.58 254,152.52
83
Appendix 15. Lost Labor Income Relative to Consumer
Spending
Consumer Spending (2005) Percent Labor Income
Income before taxes
Food at home 5.35% $11,258,024,871
Food away from home 4.27% $8,978,969,085
Shelter 17.19% $36,187,192,506
Utilities, fuels, and public services 4.43% $9,330,084,122
Household operations 1.38% $2,914,254,808
Housekeeping supplies 0.95% $2,007,739,621
Household furnishings and equipment 3.36% $7,066,988,110
Apparel and services 3.00% $6,304,110,893
Transportation 15.27% $32,136,601,759
Medical services 1.24% $2,617,403,004
Drugs 0.70% $1,465,107,291
Medical supplies 0.16% $335,155,263
Entertainment 4.47% $9,416,266,904
Personal care products and services 0.94% $1,988,587,892
Reading 0.24% $494,753,007
Education 1.40% $2,955,750,221
Personal insurance and pensions 8.78% $18,478,226,816
State and local taxes (CNN Money 2005) 10.52% $22,138,166,972
Miscellaneous 7.07% $14,890,469,528
Total 90.73% $190,963,852,675
84